The author is an analyst of NH Investment & Securities. He can be reached at email@example.com. -- Ed.
Reflecting the strong mid/long-term growth potential of S&T Motiv’s electrification business (which supplies xEV parts to both HMG and GM), we upgrade our rating from Hold to Buy. Cooperation with HMG is expected to continue even after the introduction of HMG’s E-GMP platform.
Upgrade rating to Buy on mid/long-term growth potential of electrification business
Raising our TP from W54,000 to W59,000, we upgrade our investment rating on S&T Motiv from Hold to Buy. Although short-term concerns remain amid sluggish global automobile market demand, the firm offers solid top-line expansion visibility thanks to the strong mid/long-term growth potential of its electrification business. Despite this attractive potential, S&T Motiv’s shares are currently trading at a 2020E P/E of only 8.8x.
S&T Motiv has formed a cooperative relationship with HMG (HMC/Kia Motors, Hyundai Mobis) in the xEV arena. With HMG planning to introduce E-GMP (xEV-oriented platform) in 2021, the market is concerned about a sharp shift in S&T Motiv’s business environment after the introduction of E-GMP. However, we view such worries as being overblown, noting that it is highly likely that the current cooperative structure between S&T Motiv and HMG (anchored around S&T Motiv’s cost competitiveness and Hyundai Mobis’s outsourcing policy) will sustain even after HMG’s introduction of E-GMP.
4Q19 review: Earnings satisfy our estimates
S&T Motiv posted consolidated 4Q19 sales of W258.7bn (-14.9% y-y) and OP of W25.5bn (+75.4% y-y, OPM of 9.8%), with both figures arriving in line with our estimates. Sales at the automotive parts division were weighed down by both sluggish global demand and GM labor strife, but sales at the electrification division surged to W43.5bn (+34.2%). Also contributing to sound earnings were both won depreciation and defense business growth.
We mainly attribute the drop in OPM to the fact that there was a concentration of export sales at the defense division in 3Q19. In other words, the defense division’s contribution to profitability (which displays notable quarterly volatility) was particularly high in 3Q19. Pre-tax profit growth fell q-q on forex valuation losses of about W7~8bn (stemming from the impacts on net foreign currency receivables of end-of-year forex rate drops).