Positives Still Predominate

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

 

Future earnings at Hyundai E&C’s housing business will inevitably hinge upon its pre-sales volume this year. That said, the pressure of attracting new orders should be lessened by the fact that the firm secured several overseas new orders (via private contracts) before the Covid-19 outbreak.

Positives still predominate

Although adhering to a Buy rating on Hyundai E&C, we believe that the firm will achieve only 62% of its order target in 2020, in light of the Covid 19 crisis. Accordingly, we trim back our 2020E target P/B from 1.0x to 0.60x, in turn lowering our TP from W54,000 to W37,500. We positively view the facts that: 1) the firm has already met more than 30% of its annual order guidance from both home and abroad due to aggressive business activities prior to the coronavirus outbreak in 1Q20; and 2) COGS-to-sales ratios at the company’s plant and civil engineering businesses are improving (on non-consolidated basis). But, decreased housing pre-sales volume in 2019 and a reduced portion of in-house housing projects represent risk factors.

▶ Already secured plenty of overseas new orders before Covid-19 crisis

Including the Panama Metro (W1.7tn), Algeria combined fire power plant (W0.7tn), Qatar Lusail Plaza Hotel (W0.6tn), and Saudi Arabia Jafura Gas plant package #3 (W0.6tn) projects, Hyundai E&C already secured overseas new orders of W3.6tn in 1Q20. However, these new orders were taken before the outbreak of Covid-19, and other projects in the company’s pipelines are now being delayed. At Hyundai E&C’s housing business, the annual sales portion of in-house housing projects is to shrink from 37% to 31% due to the upcoming completions of the Hillstate River City (Sept 2020) and Gaepo The H (Jan 2021) projects. Accordingly, we estimate the firm’s COGS-to-sales ratio will climb 1.6%p this year.

In-house housing project sales portion to remain high in 1Q20

Hyundai E&C should report 1Q20 consolidated sales of W4.2tn (+7.4% y-y) and OP of W196.3tn (-4.3% y-y), with both figures meeting consensus. We estimate non-consolidated housing business sales of W1.1tn and an in-house projects sales portion of 37%. As the portion of the company’s in-house projects (high margin) remains on a par with that seen last year, we expect its construction business (including housing) to record a sound COGS-to-sales ratio of 84%. Hyundai E&C’s shares are currently trading at 2020E P/E of 8.5x and a P/B of 0.5x, higher than the construction industry average P/E ratio of 4.7x.

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