Expectations Growing for Housing Market
The author is an analyst of Shinhan Investment Corp. He can be reached at hyunwook.kim@shinhan.com. -- Ed.
1Q20 earnings weighed down by provisions for Venezuela project
Hyundai Engineering & Construction posted sales of KRW4.1tr (+4.7% YoY) and operating profit of KRW165.3bn (-19.4% YoY) for 1Q20. Sales came in at solid levels but operating profit missed our estimate by 9%. COGS ratio of overseas projects improved from 96.9% in 2019 to 91.1% in 1Q20, but the company's SG&A ratio rose from 4.6% in 4Q19 to 6.6% in 1Q20 on the reflection of provisions (KRW63bn) for receivables from the refinery project in Venezuela. Excluding one-offs, we believe 1Q20 earnings were in line with market expectations. Order intake reached a post-4Q14 high of KRW9.9tr, thanks to the inflow of large-scale overseas projects at the start of the year and the intake of domestic projects for redevelopment and mixed-use buildings.
2Q20 outlook: Sales KRW4.2tr (-10.5% YoY), OP KRW243.8bn (-0.5% YoY)
For 2Q20, we forecast Hyundai E&C’s sales at KRW4.2tr (-10.5% YoY) and operating profit at KRW243.8bn (-0.5% YoY). Construction in Singapore will be suspended through June due to COVID-19 lockdown measures. Delayed projects account for an estimated 2% of total sales or KRW80bn per quarter.
Despite uncertainties in overseas market conditions from weak oil prices and the COVID-19 pandemic, we see no additional risks for the company. Pandemic-related risks have eased sharply in the domestic market. With implementation of the presale price cap postponed to end-July, domestic constructors will likely concentrate their apartment presales in 2Q20. Hyundai E&C’s presale volume is projected at 11,000 units for 2Q20.
Retain BUY and raise target price to KRW42,000 for sector top pick
We raise our target price for Hyundai E&C by 24% to KRW42,000, reflecting the rise in share valuations of domestic construction companies. Presale market conditions have remained solid with visible progress made on containment of the COVID-19 outbreak in Korea. The three construction companies under our coverage with housing operations in the domestic market have seen their shares climb by an average of 24% in April on growing expectations for the housing market. Hyundai E&C remains our sector top pick in view of: 1) large order backlog; 2) relatively high earnings stability backed by sharp growth in 2020F presale volume (31,000 units, +52% YoY); and 3) solid financials.