Quarterly Operating Losses Continue in 1Q20
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
Hyundai Steel booked operating losses for a second quarter in a row. Believing that earnings impact from the Covid-19 will hit its worst point in 2Q20, we forecast a 8.0% -y-y drop in full-year 2020 sales volume. But, the firm’s shares (currently trading at a 2020E P/B of only 0.2x) are to rebound once economic activities speed up upon the subsiding of the Covid-19 crisis.
Quarterly operating losses continue in 1Q20
Hyundai Steel’s preliminary consolidated results display 1Q20 sales of W4.668tn (-8.0% y-y), operating losses of W29.7bn (TTL y-y), and NP (excluding minority interests) of W115.4bn (TTL y-y), with the firm booking operating losses for the second quarter in a row. Consensus had predicted 1Q20 OP of W2.9bn.
On a non-consolidated basis, Hyundai Steel showed operating losses of W21.3bn (TTL y-y). While costs for the main raw materials (iron ore, hard coking coal) at the company’s blast furnace operations narrowed W10,000/ton q-q, margins improved slightly as ASPs for cold-rolled, hot-rolled, and plate products remained flat q-q. Looking at the firm’s electric furnace business, the scrap price dropped W10,000/ton q-q, and ASPs for rebar and section products upped W25,000, expanding the spread by W40,000/ton. While margins improved at both businesses, the level of benefit was insufficient to help the firm escape the red.
Impact of Covid-19 to reach worst point in 2Q20; earnings to improve from 2H20
We estimate that Hyundai Steel’s 2020 sales volume will decrease 8.0% y-y to 19.62mn tons, and OP will drop 45.2% to W62.3bn. The impacts of Covid-19 are to hit their worst point in 2Q20, with sales inevitably to be harmed by both: 1) temporary production suspensions at HMC and Kia; and 2) a contraction in global steel demand. Quarterly operating income should divide as: 1Q20 -W68.9bn (TTL y-y), 3Q20 W39.2bn (+15.0% y-y), and 4Q20 W121.6bn (TTP y-y).
Assuming a speeding up in the resumption of economic activities and the appearance of visible declines in inventory, Hyundai Steel’s earnings should improve from 2H20. With the firm’s shares currently trading at a 2020E P/B of only 0.2X, we adhere to a Buy rating and a TP of W27,000.