To Be Incorporated into Kospi 200 in June
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
POSCO Chem’s 1Q20 earnings fell short of consensus. Going forward, the company’s investment attractiveness should increase amid a recovery in investor sentiment (which has been hurt by the Covid-19 crisis) towards the rechargeable battery industry and a growing preference for stocks (driven by global liquidity expansion). We expect the firm’s incorporation into the Kospi 200 in June to serve as a positive factor.
Investment attractiveness to rise on growing liquidity-driven preference for growth stocks
With investor sentiment (which has cooled rapidly due to Covid-19) expected to recover going forward, POSCO Chem’s investment attractiveness looks set to rise in the post-coronavirus era. Backed by growing calls for a return to economic activity, operations at auto plants should soon resume, and existing environmental policies remain largely unchanged. With Volkswagen’s ID3 still on track for a summer launch, sentiment towards the rechargeable battery industry should see significant improvement as the crisis slows.
Given global liquidity expansion and an ultra-low interest rate environment, investor preference for growth stocks should strengthen. And, the growth potential of POSCO Chem, which is making large-scale investments in the rechargeable battery materials business, is expected to be highlighted. In addition to likely favorable stock market conditions, we note that POSCO Chem is to be incorporated into the Kospi 200 in June (regular change, Jun 11). Despite a likely decline in profits this year, we raise our TP by 18.2% from W55,000 to W65,000, considering an expected recovery in investment sentiment towards the rechargeable battery industry and the company’s large-scale growth-oriented investment.
1Q20 review: Earnings miss forecasts on lost chemical product sales
On a preliminary basis, POSCO Chem posted consolidated 1Q20 sales of W387.5bn (+9.1% y-y, +0.2% q-q), OP of W16.0bn (-27.2% y-y, -31.3% q-q), and NP (excluding minority interests) of W14.1bn (-57.0% y-y, -5.3% q-q), with sales arriving similar to consensus but OP and NP missing the mark by 25.1% and 11.5%, respectively.
Affected by price decline for HSFO (a benchmark for coal tar ASP), the coal tar business likely suffered an operating loss. Inventory valuation losses were likely registered for cathode materials as well. Despite falling needle coke prices, subsidiary PMC Tech enjoyed a reduction in operating losses (4Q19: -W10.4bn → 1Q20: -W5.1bn) thanks to greater shipment volume. POSCO Chem expects 2Q20 OP to arrive similar to the 1Q20 figure, considering the effects of the Covid-19 crisis and POSCO’s furnace repairs.