Investment Appeal Strengthening
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
Daelim Ind’s share price momentum is to continue being energized by: 1) sound earnings at its housing business; 2) the start of reflection of earnings contributions from Korea Development Corp and Cariflex; and 3) improved profitability at its chemical business (on the recent plunge in oil prices). Being on the rise since 2018, the firm’s earnings should continue to expand in 2020.
Investment appeal strengthening thanks to multiple factors
Although adhering to a Buy rating on Daelim Industrial (Daelim Ind), we downwardly adjust our 2020E new orders achievement ratio to 75% and trim back our 2020E target P/B from 0.9x to 0.68x, in turn lowering our TP from W131,000 to W104,000. But, we note: 1) the company’s lower overseas new orders exposure (14%) versus the industry average (43%); 2) anticipated earnings improvement at the firm’s chemical arm (including at Yeochun NCC); and 3) the arising of a governance restructuring scenario in the wake of the announcement of a planned merger between subsidiaries and the accumulation of a sizable Daelim Ind stake by a yet-to-be-identified party.
In most of the countries where domestic construction companies are seeking new orders, Koreans are now barred entry amid the Covid-19 crisis. Fortunately, Daelim Ind has been gradually reducing its overseas exposure since 2015—its 2020 overseas order portion of sales is estimated at less than 15%. In the domestic market, meetings for reconstruction/redevelopment projects are being postponed due to social distancing practices. Accordingly, builder selection and pre-sales for these projects are being delayed. But, Daelim Ind: 1) already has a backlog of more than W1.0tn (including the Seongsu-dong office building); and 2) is scheduling its first pre-sale for 2020 after May. Daelim Ind’s housing business is targeting 2020 sales of W5.3tn.
Daelim Ind’s share price has been surging as of late on expectations for governance reorganization, which have been gathering momentum since: 1) the announcement of plans to merge two subsidiaries, Samho and Korea Development Corp in Mar 2020; and 2) the accumulation of a sizable Daelim Ind stake by a yet-to-be-identified party. Although we cannot identify the intention behind the stake purchase by the unknown party, related controversy will likely persist considering the firm’s low DPR and future capital requirement for investment in its chemical business.
Offers both sound earnings and valuation merit
We expect Daelim Ind to register consolidated 1Q20 sales of W2.7tn (+14.7% y-y) and OP of W265.9bn (+10.4% y-y), with both figures beating consensus. We mainly attribute this likely earnings improvement to: 1) the start of reflection of earnings contributions from Korea Development Corp; and 2) sound earnings at the firm’s housing business. Still, we expect Daelim Ind to book equity-method losses of W44.7bn, including inventory valuation losses from Yeochun NCC. Accordingly, we believe that 1Q20 NP (excluding minority interests) was limited to W149.2bn (-36.9% y-y). The firm’s shares are currently trading at 2020E P/E of 3.5x and P/B of 0.4x, boasting valuation merit versus the industry average P/E of 4.5x.