Sufficient Liquidity to Steer Company Through Crisis
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com. -- Ed.
Although short-term earnings visibility has declined, the firm can flexibly respond to sluggish demand by securing preemptive liquidity. It should also benefit from its asset-lite business structure. As demand recovers in the future, the company’s undervaluation should gradually fade.
Sufficient liquidity and low fixed-cost burden to steer company through crisis
We maintain a Buy rating on Hyundai Glovis, but lower our TP from W200,000 to W150,000 as we cut 2020E OP by 23% due to production and logistics disruptions at major clients.
Owing to sluggish short-term demand, the firm’s profit visibility after 2Q20 has fallen significantly. However, as of end-1Q20, the company’s cash and cash equivalents stood at W2.2tn. In addition, as 30% of its fleet operates under short-term charter contracts, flexible ship operation is possible, unlike its competitors, which have 90% of their fleets under long-term contracts. If demand for finished cars normalizes, Glovis’s ROE should rebound back above 10%, albeit with time lag. Also, the firm’s valuations should normalize from the current 2020E P/B of 0.7x to 1.1x, its historical average.
Covid-19 has little effect on 1Q20 earnings
Glovis’s 1Q20 results satisfied market consensus, with sales of W4.7tn (+11.4% y-y) and OP of W195bn (+5.2% y-y; OPM 4.1%). The strong sales are attributed to: 1) favorable forex rates; and 2) a temporary increase in complete knock down (CKD) shipping volume to secure sufficient inventory amid concerns over supply chain disruptions. On the non-operating side, despite forex translation losses of W78bn, the firm booked ship insurance gains of W106.5bn, allowing its NP to exceed our estimate.
By business, earnings broke down as follows: 1) Logistics: Despite a decline in domestic auto sales, sales at the division rose 2.6% y-y thanks to greater overseas transportation volume. OP at the division dropped 9.4% y-y to W62.5bn owing to higher costs. 2) Shipping: Sales at the bulk carrier business slid due to profitability-oriented ship operations. The business maintained a small OP, after turning to profit in 4Q19. Pure car carrier (PCC) sales grew 13.1% y-y; however, OP (W27.9bn) slid 1.8% y-y due to one-off costs (low sulfur fuel costs). 3) Distribution: CKD sales rallied 30.2% y-y on a production hike in India and efforts to bolster inventory levels due to concerns over supply chain disruptions. OP at the distribution business rose 18.9% y-y to W104.5bn.