Planning to Acquire W1tn Worth of Treasury Stock
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
POSCO’s 1Q20 OP exceeded consensus. We expect the impact of Covid-19 to be greatest in 2Q20, with demand to recover on the normalization of downstream industries from 2H20. The acquisition of treasury shares and a likely dividend of W10,000 per share are predicted to offer strong downside support to the stock.
1Q20 consolidated OP falls 41.4% y-y
On a preliminary basis, POSCO registered consolidated 1Q20 sales of W14.55tn (-9.2% y-y, -9.3% q-q), OP of W705.3bn (-41.4% y-y, +26.5% q-q), and NP (excluding minority interests) of W395.4bn (-46.7% y-y, +680.3% q-q), with sales arriving 4.9% short of expectations but OP and NP exceeding forecasts by 16.3% and 6.8%, respectively. A decline in raw material prices and improved earnings in the global infrastructure sector (including construction and energy) led to a q-q hike in OP.
Non-consolidated OP came in at W458.1bn (-45.0% y-y, + 24.8% q-q). With carbon steel ASP falling by W5,000 q-q and raw material costs dropping by W20,000/ton q-q, profitability improved. Non-consolidated OPM grew 1.6%p q-q to 6.6%. Affected by repair work at Gwangyang blast furnace #3 and construction work at HR line #4, product sales slid to W8.62mn tons (-7.1% y-y, -4.3% q-q).
Downside support strengthened; rebound in economic activity key to share price hike
During its earnings call, POSCO lowered its 2020 consolidated sales forecast by 9.8% and non-consolidated sales volume estimate by 7.4%. Although the impact of Covid-19 is expected to fade from 2H20 after dealing its heaviest blow in 2Q20, downward revision of earnings forecasts looks inevitable due to likely reduced sales volumes and lower product prices.
That said, the firm’s plans to acquire W1tn worth of treasury stock and pay out a DPS of W10,000 should strengthen its downside support. And, the stock is forecast to rebound as the Covid-19 crisis fades and economic activity resumes. However, the pace of normalization in downstream industries will be key variables, with China’s high steel inventory and cost burden associated with iron ore prices likely limiting POSCO’s performance and stock price rebound.