External Environment Unfavorable

The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.

 

 

Thanks to a large-scale apartment pre-sales made last year, Daewoo E&C’s housing business should see earnings growth in 2020. The firm is also expecting possible reversals of 2018~2019 losses from overseas projects, whereas other domestic construction players have already booked such reversals. With its strong earnings momentum standing out in the construction industry, we suggest Daewoo E&C as our second-preferred pick for the sector.

Key investment points still valid

Although adhering to a Buy rating on Daewoo E&C, we downwardly adjust our 2020E new orders achievement ratio to 64% and trim back our 2020E target P/B from 1.0x to 0.70x, in turn lowering our TP from W4,200 to W6,500. Our established investment thesis includes: 1) anticipated sales growth at the company’s housing business thanks to its aggressive apartment pre-sales made in 2019; and 2) KDB Investment’s efforts to normalize management—we view both of these points as remaining valid. On the other hand, due to tough external environment, it is unlikely that it will be able to meet its annual guidance for both apartment pre-sales and overseas new orders. Given such, we drop Daewoo E&C from our sector top pick to our second-preferred pick.

Apartment pre-sales prove better than expected, but new orders slow

Daewoo E&C proceeded with apartment pre-sales for its Suwon Paldal, Gyeongbuk Pohang, and Songdo Edufore projects in 1Q20, recording a sales rate of 100%. It is unlikely that the firm will be able to meet its 1H20 sales volume target of 22,000 units. However, given that only 5,000 units among the company’s total housing project pipelines are to be affected by pre-sales price cap regulations, Daewoo E&C does not have rush its sales schedule before August, the time at which the grace period for the regulation is to end.

We expect the firm to recognize overseas new orders of more than US$2.0bn in 1H20, including the NLNG Train #7 (US$1.6bn) project. However, we expect contracts from other pipelines in Iraq, Oman, and Qatar to be delayed due to Covid-19-related quarantine measures and entry prohibitions. We forecast 2020 new orders of W10.1tn, compared to guidance of W12.5tn.

Boasts both sales growth momentum and valuation merit

On a consolidated basis, we expect Daewoo E&C to report 1Q20 sales of W2.1tn (+1.5% y-y) and OP of W121.2tn (+23.0% y-y), with both figures topping consensus. We attribute these likely sound earnings to sales from projects for which construction began in 2H19 and are making progress in earnest, including the GTX-A (W500.0bn), Hillstate Prugio Juan (250.0bn), and Incheon Galsan-dong Knowledge Industry Center (W280.0bn) projects. The firm’s shares are currently trading at a 2020E P/E of 3.3x and a P/B of 0.5x, a level lower than the construction industry average P/E ratio.

 

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