Waiting for New LNG Projects
The author is an analyst of NH Investment & Securities. He can be reached at jinmyung.choi@nhqv.com. -- Ed.
Despite reduced sales due to the completion of the Rotan Project, SHI succeeded in cutting its operating deficit by a significant amount in 1Q20. However, due to Covid-19, the firm’s one-off costs increased and it experienced a sharp decline in new orders.
1Q20 review: Deficit declines significantly
SHI reported 1Q20 sales of W1,826.6bn (-15.3% q-q) and an operating loss of W47.8bn (OPM of -2.6%). Despite reduced sales due to the completion of the Rotan Project, OPM rebounded somewhat. We expect the firm’s profitability to keep improving as its shipbuilding sales portion continues to widen.
Forward exchange transactions risks expand due to Covid-19
Although SHI’s operating loss shrank, it booked one-off costs of approximately W53bn in 1Q20. As most of the one-off factors are related to Covid-19, additional one-off expenses are possible in 2Q20.
In particular, forward exchange transactions related to terminated drilling rig contracts are driving up profit volatility. In 1Q20, the firm booked W58.2bn in forex gains for inventory (OP), but it also incurred a cost of W103.3bn relating to forward exchange transactions (non-operating expense).
Difficult to secure new orders; wait for new LNG projects
Due to Covid-19, the firm’s new orders amounted to only US$300mn (-89.7% q-q) in 1Q20. Noting the lack of new orders in April as well, we expect a sluggish new order figure for 2Q20.
In order to overcome this situation, large-scale LNGC contracts are required. SHI has almost secured an order for 10 LNGCs for Russia, and orders are expected to be placed in Qatar/Mozambique later in the year. Accordingly, we expect order momentum to pick up in 2H20.