The author is an analyst for NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
Offshore fixed-cost burden is weighing on 2024 earnings momentum, but the long-term profit outlook remains favorable. LPG and ammonia carrier orders are likely to exceed targets. Rising vessel prices and sound order intake are resulting in a qualitative improvement in order backlog.
Pace of earnings improvement disappointing, but order intake better than expected
We maintain a Buy rating and TP of W150,000 on HHI. We cut our 2024 OP projection by 25%, but the firm’s mid/long-term profit improvement trajectory should remain largely unchanged. We lower our 2024 OP forecast to reflect: 1) weaker revenue and higher fixed-cost burden in the offshore segment; and 2) a slight uptick in labor and outsourcing costs. Fixed costs should ease at the offshore segment as the Trion FPU project awarded in 2H23 should be fully reflected in sales from 2025. The shipbuilding division continues to benefit from rising vessel prices and increasing volume, while the engine division should continue to benefit from price and shipbuilding volume growth, leading to improved performance.
The firm set an order target of US$9.53bn for 2024, but as of Jan 22, US$1.33bn (14% of the target) has already been received for commercial ships. We expect to see differentiated order intake in the large LPG carrier and ammonia carrier markets, where demand has been growing recently. As a result, we forecast 2024 orders of US$10.4bn. A qualitative improvement in order backlog is expected, as well, as recently received orders are scheduled for delivery in 2027~2028.
4Q23: Sales better than expected on greater shipbuilding volume
HHI booked 4Q23 sales of W3.41tn (+28% y-y, +20% q-q) and OP of W138.6bn (+525% y-y, +974% q-q; OPM of 4.1%). Sales were better than expected on higher shipbuilding volume and improved orderbook mix, while OP improved thanks to greater shipbuilding volume, lower fixed-cost pressure, and one-off gains.