Defense Business Enjoy Solid Earnings
The author is an analyst of NH Investment & Securities. He can be reached at soohong.cho@nhqv.com. -- Ed.
Despite earnings uncertainties, S&T Motiv should fare better than most plays in 2Q20, thanks to the nature of its business structure. In the long term, in addition to anticipated growth at the electrification business, the firm should enjoy an ongoing cooperative relationship with Hyundai Motor Group, even after the introduction of E-GMP.
Earnings to be shored up by electrification business growth and strong order backlog for defense sector
While adhering to a Buy rating on S&T Motiv, we lower our TP from W59,000 to W47,000 on changes to our earnings forecasts. Although the automotive parts division’s earnings are likely to deteriorate in 2Q20, overall earnings should be shored up by both earnings growth at the xEV motors business and solid earnings at the defense business (backed by a strong order backlog).
We expect to see ongoing mid/long-term earnings growth at the electrification business, backed by sales of such products as xEV (EV/HEV) motors to HMG and Bolt (EV) drive units to GM. With HMG set to introduce E-GMP (xEV-exclusive platform) in 2021 and GM planing to produce xEVs in China from this year, S&T Motiv’s electrification-related sales portion should rise from 20.7% in 2019 to 37.5% in 2022.
1Q20 review: Logs solid results, despite concerns
S&T Motiv logged 1Q20 sales of W216.5bn (-4.0% y-y) and OP of W18.8bn (+35.2% y-y; OPM of 8.7%), recording solid results relative to market concerns. Due to its high portion of domestic production, the effects of a weakening won proved significant, and the decline in auto parts sales due to Covid-19 was largely offset by earnings growth at the xEV motors business.
Backed by a robust order backlog, earnings expansion continued at the other (defense) division, with 1Q20 sales reaching W23.7bn (+70.1% y-y). We expect the division’s 2020 sales to evidence y-y improvement. Although sales of auto parts decreased to W196.6bn (-11.2% y-y) in 1Q20, xEV motor sales grew to about W40.5bn (+49.5%). Meanwhile, it is estimated that large-scale forex translation gains (roughly W10bn) were generated from net foreign currency receivable thanks to a rise in end-quarter forex rates.