Business Portfolio Well-balanced
The author is an analyst of Shinhan Investment Corp. He can be reached at yjjung86@shinhan.com. -- Ed.
Initiate coverage with BUY and target price of KRW60,000
We initiate coverage of POSCO Chemical at BUY for a target price of KRW60,000. Our target price is based on the 12-month forward EPS estimate and a target PER of 40x, reflecting the average PER recorded since mid-2018 as the company started to enjoy visible growth as the battery materials affiliate of the POSCO Group. Amid the group’s strong commitment to investment into non-steel operations, POSCO Chemical has emerged as the sole supplier of major materials with strong growth potential such as needle coke, anode and cathode materials. Solid earnings continuing from existing operations (refractories and burned lime) further add to the positives of POSCO Chemical, which we believe deserves to trade at a higher valuation.
Attractive on well-balanced portfolio and vertical integration expectations
POSCO Chemical stands out among domestic battery materials peers with its well-balanced business portfolio. The company’s existing operations produce refractories and burned lime, key materials used in steel production, while offering repair and maintenance services. Including the highly-related chemicals business (produces cokes), existing operations account for KRW1tr in annual sales at an operating profit margin above 5%.
Meanwhile, POSCO Chemical is expected to directly benefit from POSCO Group’s growing focus on non-steel operations and continuing investment into the anode/cathode value chain. POSCO Chemical, through the merger with cathode maker POSCO ESM (December 2018), became the only company to produce both anode and cathode materials in the domestic market. Supply of artificial graphite (high-quality anode material) from subsidiary PMC Tech should allow additional product expansion. POSCO Group’s aggressive expansion into the lithium business also bodes well for further growth of POSCO Chemical’s cathode business going forward.
2020 OP forecast at KRW97bn (+8.0% YoY) with cathode to drive growth
For 2020, we forecast sales at KRW1.9tr (+25.4% YoY) and operating profit at KRW97bn (+8.0% YoY). Sales from existing operations will likely stagnate around KRW1.2tr (-1.0% YoY) on weak client demand. However, sales from the new materials business (anode and cathode, etc.) should more than double on a YoY basis to KRW601bn (+174.4% YoY) in 2020. Backed by strong demand for cathode materials, the new materials business is expected to account for 32.3% (+17.5%p YoY) of consolidated sales for the full year. Long-term supply contracts with major clients should expedite the ramp-up of new facilities.