External and Qualitative Improvement to Continue in 2020
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
Daewoo E&C saw earnings improvement in 1Q20, helped y-y by the absence of one-off items booked in 1Q19. Earnings should trend upwards through 2H20 on greater sales at the housing division. The firm’s domestic housing sales and new overseas orders are both to concentrate in 2H20. Currently trading at a 2020E P/B of 0.5x and a P/E of 4.1x, Daewoo E&C shares appear undervalued versus the construction industry average.
External and qualitative improvement to continue in 2020
We maintain a Buy rating and a TP of W4,200 on Daewoo E&C, noting: 1) top-line growth at its housing business thanks to healthy 2019 pre-sales (over 20,000 units) and aggressive plans to sell 35,000 units this year; 2) likely new orders of over W5tn, including for the Nigeria’s NLNG Train #7 project (US$1.6bn) and Qatar’s North Field Expansion Pkg #1 project (US$1.0bn); and 3) KDB Investment’s ongoing efforts to normalize management.
The firm is adhering to its 2020 pre-sales target of 35,000 units that was announced at the start of the year. Pre-sales of approximately 2,700 units were completed in 1Q20, including at the Maegyo Station Prugio SK VIEW complex (2,090 units) and Ansan Prugio Bripark (588 units). As the pre-sale price ceiling scheme has been postponed to end-July, pre-sales events originally planned for 2Q20 are likely to be carried out in 3Q20.
Overseas orders are to concentrate in 2H20. Nigeria’s NLNG Train #7 project (US$1.6bn) and Iraq’s Al Faw Container Terminal Pkg #2 project (US$0.5bn) are both scheduled to announce bidding winners in 3Q20, and winner announcements for Qatar’s North Field Expansion Pkg #1 project (US$1.0bn) and Singapore’s Cross Island Line CR101 & CR108 (US$0.7bn) project are scheduled in 4Q20.
1Q20 review: COGS-to-sales ratio and SG&A improve
Daewoo E&C reported consolidated 1Q20 sales of W2.0tn (-2.2% y-y) and OP of W120.9bn (+22.7% y-y), with OP meeting our estimate of W121.2bn and topping consensus of W99.8bn. Housing division sales slightly underperformed, but COGS-to-sales ratios at the firm’s civil engineering and plant arms improved significantly. Daewoo E&C reported SG&A expense of W96.1bn (-16% y-y) and a SG&A-to-sales ratio of 4.8% (-0.8%p y-y), helped y-y by the absence of one-off items booked in 1Q19 (ie, incentive payments of W16.7bn; relocation costs of W4.0bn). But, the company recorded other costs of W30.0bn (forex translation losses of W20.0bn; other losses of W10.0bn).