Sales Projected to Increase Steadily
The author is an analyst of Shinhan Investment Corp. He can be reached at eoyeon.hwang@shinhan.com. -- ED.
1Q20 OP of KRW11.7bn (TB YoY) exceeds consensus
Hyundai Rotem posted operating profit of KRW11.7bn (+918.4%YoY) on sales of KRW670.5bn (+13.6% YoY) for 1Q20, beating the market consensus (operating loss of KRW6bn). Despite M&A expenses of KRW13bn, earnings topped market expectations thanks to: 1) decrease in the portion of fixed costs on sales growth; and 2) recovery in profitability of railway and defense divisions on the recognition of sales from high-margin projects. On the non-operating side, the company booked a KRW43bn loss on foreign currency transactions with the depreciation of emerging market currencies.
The railway division recorded sales of KRW354bn (+8.6% YoY) and operating profit of KRW5bn (+0.0% YoY) in1Q. Full-fledged recognition of sales from the high-margin electric train project in Taiwan offset losses from the project in Australia, which showed further margin deterioration on weakening Australian dollar and delays in engineering design. The defense division saw operating profit soar 800% YoY to KRW9bn, as the fixed cost burden decreased with the start of second production for K-2 battle tanks.
2020 outlook: Sales of KRW2.7tr (+9.2% YoY), OP of KRW41.7bn (TB YoY)
For 2020, we forecast sales at KRW2.7tr (+9.2% YoY) and operating profit at KRW41.7bn (positive swing YoY). Sales are projected to increase steadily QoQ thanks to brisk order intake of KRW3.8tr in 2017 and KRW3tr each in 2018 and 2019. We also expect a gradual improvement in profits with the completion of a sewage treatment plant project in Qatar in 1H20 and low-margin domestic projects wrapping up in 2H20. For 2Q, the company is set to book gains of KRW21.4bn from the sale of a stake in Green Air and KRW22.9bn from the disposal of land.
Retain Trading BUY and raise target price by 38.4% to KRW17,300
We raise our target price for Hyundai Rotem by 38.4% to KRW17,300. Shares continue to fluctuate widely on inter-Korean project issues, making quantitative valuation difficult. Until the volatility declines, we retain our Trading BUY rating at a target price based on current share price levels. The value of Hyundai Rotem’s main business is assessed at KRW0.6tr (KRW3,689 per share) based on 2021F net profit and a target PER of 17.3x (global peer average).