Overseas New Orders Mostly Being Delayed
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
External environment tough: Oil price plunge + Covid-19 crisis
Overseas new orders are mostly being delayed due to the Covid-19 crisis and oil price plunge. A higher valuation level versus the construction industry average represents a burden for Samsung Eng’s shares.
Relatively higher overseas exposure becomes issue
Although adhering to a Hold rating, we downwardly adjust our 2020E new orders achievement ratio for Samsung Engineering (Samsung Eng) to 51%, in turn lowering our TP from W21,000 to W12,500. Annual new orders at its non-hydrocarbon arm should sustain at W3.0tn, led by orders from affiliates. But, we assume a new orders achievement ratio at hydrocarbon business of less than 50% due to limited business activities amid the Covid-19 crisis.
Concerns in play towards overseas new orders
According to the MEED, Samsung Eng was appointed in March as the preferred bidder for Saudi Arabia Jafura gas treatment plant project package #2 (US$1.5bn). The firm is also expecting a favorable announcement for the Malaysia Sarawak methanol plant (US$1.0bn) in 1H20. According, Samsung Eng should be able to achieve new orders of more than US2.5bn during 1H20.
However, other key pipeline projects scheduled for 2020, including the US PPTDLM ethane cracking center (ECC) project (US$1.1bn) and the Mexico Dos Bocas refinery project (US$3.2bn), are likely to be delayed due to: 1) lowered profitability for owners on the recent oil price plunge; and 2) limited business activities as a result of Covid-19-related quarantine measures.
1Q20 preview: Earnings dampened y-y by high-base effect
On a consolidated basis, we expect Samsung Eng to report 1Q20 sales of W1.4tn (+3.0% y-y) and OP of W73.0bn (-38.7% y-y), with OP meeting consensus. As major overseas projects climb onto the track, its process rate is to improve and sales at its hydrocarbon business should improve to W715.0bn (+25% y-y). However, given one-off gains booked for 1Q19 on after-completion cost adjustments for overseas projects, OP is to decrease on y-y. The firm’s shares are currently trading at 2020E P/E of 8.5x (a higher than construction industry average of 4.7x) and a P/B of 1.4x.