Busan Plant Site Released from Greenbelt Restrictions
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
Poongsan posted a 1Q20 operating loss. While defense sales should be revived by the signing of a Middle East supply contract, copper sales will likely decline due to Covid-19. We expect reevaluation of the Busan plant site to serve as a positive event for the firm’s enterprise value.
Defense sales to recover in 2020, but copper business-related difficulties likely to continue
Sales at Poongsan’s defense business are expected to recover, thanks to the signing of a W95.7bn supply contract in the Middle East and US demand for ammunition following the outbreak of Covid-19. We estimate 2020 sales at the defense business at W735.3bn (+21.5% y-y), a 10% increase versus our previous forecast. Meanwhile, we advise paying attention to reevaluation of Poongsan’s land holdings, given plans to relocate the Busan plant. The firm’s enterprise value should rise alongside the release of the Centum 2 District Urban High-tech Industrial Complex (includes 430,000 m2 of the Busan plant site) from greenbelt restrictions. However, how and to what extent the expected benefits of increased asset value will be directed towards enhancing the public good is to remain an important variable going forward.
Regarding Poongsan’s share price, a rebound in copper prices and a recovery in sales of copper products are key variables. Affected by the global Covid-19 pandemic, both copper prices and demand for copper products will likely remain weak for some time. While the prospects for a defense business sales recovery look promising, likely sluggish copper sales due to growing concerns towards a global economic downturn are to play a larger role in determining the firm’s share price direction. We adhere to a Hold rating and TP of W20,000.
1Q20 review: Logs consolidated operating loss
On a preliminary basis, Poongsan logged consolidated 1Q20 sales of W581.2bn (+2.0% y-y), an operating loss of W1.6bn (TTL y-y), and a net loss (excluding minority interests) of W3.2bn (TTL y-y), with sales arriving similar to market expectations but operating and net incomes falling short. We mainly attribute the deficits to losses at overseas subsidiaries, including US subsidiary PMX.
In 1Q20, non-consolidated OP came to W12.4bn (-3.0% y-y, -3.3% q-q), arriving similar y-y and q-q. OP decline related to changes in copper price were offset by metal-related gains of W4bn and inventory valuation loss allowance of W4bn. While defense business sales came in similar y-y at W101.1bn, profitability worsened due to a drop in the portion of exports.