To Benefit from Digital Transformation

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

 

Amid the spread of Covid-19, the execution of new SI projects may be delayed. However, as half of Hyundai Autoever’s sales come from recurring IT outsourcing services, strong earnings are anticipated in the near term. We believe that expectations for healthy mid/long-term earnings remain valid, favorably viewing the firm’s strategic growth business amid clients’ accelerating digital transformation.

Strong earnings expected in short-term; to benefit from digital transformation in mid/long term

Hyundai Autoever’s fundamentals appear relatively solid. While new system integration (SI) projects may be delayed by Covid-19, the IT outsourcing business (contributes about 54% to overall revenue) should remain essential to the firm’s clients, as it is a key to sustaining stable business performance. And, given that its non-captive client portion is only 6%, the company’s earnings should remain strong.

Amid the spread of Covid-19, society’s digital transformation (the building of non-face-to-face economic infrastructure) is to further accelerate. Following Samsung Group, LG and SK member companies are targeting a transition towards cloud-based operating environments within two years. Going forward, the utilization of cloud-based solutions is to become widespread in both the private and public spheres. Over the mid/long term, Hyundai Autoever should enjoy strengthening earnings growth and margin improvement, backed by a higher sales contribution from its strategic businesses, including the Global One-IT, smart factory, smart building/home, and smart mobility domains.

Considering the possibility of delayed sales recognition for new SI projects, we downwardly adjust our 2020 sales estimate by 3% and OP projection by 8%. While adhering to a Buy rating, we lower our TP from W66,000 to W55,000, reflecting: 1) downward adjustments to our earnings forecasts; and 2) share price revisions for the firm’s peer group, with the target EV/EBITDA multiple falling from 10x to 6.8x (reflecting a 20% discount to the peer group average).

1Q20 preview: Earnings to arrive short of consensus

Hyundai Autoever is expected to book 1Q20 sales of W329.9bn (+8% y-y) and OP of W12.3bn (+5% y-y), with both figures coming in short of consensus.

Relying on sales from a variety of SI projects, the SI division is anticipated to post 1Q20 sales of W161.4bn (+7% y-y), showing slightly slower growth versus the 2019 level (+10% y-y). Given base effect, the impacts of Covid-19 are predicted to emerge in 2Q20 (2Q20F sales growth: +2% y-y). Meanwhile, the ITO division likely saw relatively favorable earnings growth, booking 1Q20E sales of W168.5bn (+8% y-y). However, weighed upon by off-seasonality and the integration of IT personnel from both domestic and overseas affiliates (in progress since 2Q19), profitability at the division likely proved somewhat tepid.

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