Oil Price Plunge to Negatively Impact 2H20 Earnings

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

 

KOGAS holds an estimated (as of end-4Q19) W1.2tn worth of assets that are exposed to possible impairment losses. But, even after deducting the total value of these assets, we view KOGAS’s current market value as being excessively undervalued. If assuming 100% reflection of the impairment losses, the firm’s shares are currently trading at a 2020E P/B of 0.3x (with net assets of W6.9tn).

Excessively undervalued even despite high possibility of additional impairment losses

Although adhering to a Buy rating, we lower our TP on KOGAS from W57,000 to W31,000 as we deduct W1.2tn worth assets of overseas projects exposed to impairment losses from the fair value of the firm’s domestic business of W4.1tn (calculated based on 2020E after-tax guaranteed returns). KOGAS’s share price has plunged since Jan 2020, the time at which impairment losses-related woes become an issue. While its accumulated assets of subsidiaries holding overseas projects are sized at only W1.2tn, KOGAS’s market value is discounted by W2.0tn compared to its 2020E domestic after-tax guaranteed returns of W4.1tn. If oil prices remain at the current level, the fair value of W1.2tn worth of assets would be recalculated every year, and the difference would be reflected as costs. For reference, the fair value of KOGAS’s overseas projects stood at W2.9tn in 2016—more than W1.4tn of this figure has turned into costs over the past four years.

The other factor that discounts KOGAS’s market value is W1.4tn worth of uncollected accounts receivable at its domestic business due to suspension of the fuel cost linked pricing system. Fortunately, these accounts receivable have started to be collected since 3Q19, and as of 1Q20, the amount is estimated to have declined to W0.9tn. We expect the remainder of the receivables to be collected by end-2Q21. Meanwhile, the recent plunge in oil prices should positively affect KOGAS’s domestic business earnings in light of the time gap between raw material input prices and selling prices

Oil price plunge to negatively impact 2H20 earnings

We expect KOGAS to register 1Q20 consolidated sales of W8.8tn (+1.4% y-y) and OP of W860.8bn (-1.0% y-y), with OP meeting consensus. With KOGAS’s long-term oil price forecast for 1H20 overseas projects having been set at US$58/bbl, the sharp oil price downtrend since March is to negatively affect its 2H20 earnings. Meanwhile, production volume this year for the firm’s GLNG and Prelude FLNG projects is to increase 13% y-y and 150% y-y, respectively, with maximum output levels for the projects to be reached in 2025. Of note, the Brent oil price-based OP and NP BEPs for these projects are US$50/bbl and US$70/bbl, respectively.

 

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