The author is an analyst of NH Investment & Securities. He can be reached at firstname.lastname@example.org. -- Ed.
We expect the value of Poongsan’s land holdings to come under the spotlight on the anticipated relaxation of greenbelt restrictions at the Busan plant site and likely relocation of plant facilities. Believing that the firm’s 2020 earnings will be negatively impacted by Covid-19-related sales volume decline and copper price cuts, we downwardly adjust 2020E EPS, in turn lowering our TP for the play.
Busan plant site to be released from greenbelt restrictions
According to the Busan city government, on Mar 26, the Ministry of Land, Infrastructure, and Transport’s Central City Planning Committee gave conditional approval for the release of the Centum 2 District Urban High-tech Industrial Complex from restricted development zoning. We note that this area includes 1.0mn m² of Poongsan’s 1.4mn m² Busan plant site.
While the Busan plant’s book value sits at W181bn, the Busan Daily reported on Mar 22 that the Busan government is expected to pay W500bn in compensation for 1.0mn m² of the site. If applying the same valuation rate (W1.6mn/3.3m²) to the site’s remaining land, we arrive at a total value for the Busan plant site of close to W700bn, a figure significantly above the current book value.
We note that a social consensus will likely need to be reached regarding the calculation of compensation to Poongsan, the value of Poongsan’s factory site, and the distribution of profits from the sale. Going forward, we advise paying attention to the fate of the remaining 0.4mn m² of land not included in Centum 2 district.
Reflecting Covid-19 effects, slash 2020E EPS by 46.6%
Reflecting the impact of Covid-19’s global spread, we downwardly adjust our 2020 consolidated OP and EPS estimates for Poongsan by 47.7% and 46.6%, respectively, versus our previous forecasts. Adhering to a Hold rating, we lower our TP by 20% to W20,000, a figure which equates to a 2020E P/B of 0.4x (ROE of 2.2%).
We size Poongsan’s consolidated 1Q20 sales at W575.1bn (-0.9% y-y), OP at W4.8bn (-69.4% y-y), and net loss (excl minority interests) at W1.0bn (TTL y-y), expecting sales and net loss to arrive in line with consensus but OP to miss the mark by 66.2%. We predict that the company’s consolidated 2Q20 OP will come in at W1.2bn (-86.1 % y-y), given likely weak copper prices and sluggish sales.
NH Investment & Securities