Absolute Advantage in Reconstruction/redevelopment Projects
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
GS E&C possesses an absolute advantage over rivals in reconstruction/ redevelopment projects. Thanks to its shift to a housing business-centric sales structure last year, margins are set to improve. The firm is also taking a selective approach to overseas new orders, which should guarantee high profitability. Its shares boast valuation merit compared to the construction industry average.
Boasts stable earnings structure on domestic market-centric business model
Although adhering to a Buy rating, we downwardly adjust our 2020E new orders achievement ratio for GS E&C to 69% and trim back our target P/B from 0.9x to 0.6x, in turn lowering our TP from W41,000 to W28,000. The firm’s sales exposure towards the domestic market and its construction arm (including its housing business) rose last year to 71% (+12%p y-y) and 58% (+4%p y-y), respectively. Given more than half of existing new orders at the plant business are from domestic petrochemical affiliates, we expect to see stable earnings. We forecast overall 2020 OP of W789.1bn (+2.8% y-y).
Advantage over rivals in reconstruction/redevelopment projects absolute
GS E&C conducted pre-sales for four projects in 1Q20, including Gaepo Pregidence Xi, Cheongra Hills-Xi, and Gwacheon Jade Xi. The firm also started construction at Heukseok 3 and Jeungsan 2 before pre-sales?sales from these projects are to be reflected from 2Q20. Although GS E&C has not adjusted its annual pre-sales guidance of 25,000 units, its pre-sales schedule will likely be delayed, affected by a delay in the price-cap regulations. For reference, the firm’s in-house housing project in Song-do is slated to run pre-sales in September. Given its reconstruction/redevelopment projects backlog of W30tn, we believe that GS E&C will be able to sustain its current sales performance for at least 5~6 years, despite likely delays in new order intake due to Covid-19.
Offers both stable earnings and valuation merit
GS E&C should report 1Q20 consolidated sales of W2.8tn (+6.9% y-y) and OP of W192.1tn (+0.3% y-y), with both figures meeting consensus. While W40.0bn worth of incentives were booked in 1Q19, we do not expect the recurrence of such one-off costs in 1Q20, noting that 2020 incentives were already recognized in 4Q19. Also positive, we believe that the margins widening trend witnessed in 2019 at the housing and plant businesses will continue in 2020. GS E&C’s civil engineering, plant, and housing business should show annual COGS-to-sales ratios of 95.0%, 92.0%, and 84.0%, respectively. Currently trading at a 2020E P/E of 3.2x and a P/B of 0.4x, GS E&C’s shares boast valuation merit compared to the construction industry average P/E of 4.7x.