Earnings of Chemical Business Primed to Recover
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
Led by the domestic housing arm, sales at Daelim Ind’s construction business are to remain stable, And, earnings at its chemical business are primed to recover on cost competitiveness of NCCs over ECCs. Given a dependence upon construction business earnings, overall OP will likely stagnate in 2020 and 2021. But NP, which evenly reflects performance of all of the firm’s businesses, is set to expand 17% this year and 19% next year. Currently trading at a 2020E P/E of 4.0x, we view the firm’s shares as being undervalued compared to peers in both of its major business areas.
Look at NP reveals earnings for all of firm’s businesses
Maintaining a Buy rating, we raise our TP on Daelim Industrial (Daelim Ind) from W104,000 to W107,000 in light of a 3% upward adjustment to 2020F EPS made in light of earnings improvement at the firm’s chemicals division and at subsidiaries Yeochun NCC and Polymirae (50% stake in both). Having been absent in the past, synergies are now starting to appear between Daelim Ind’s two major businesses. But, overall earnings should improve from this year thanks to both a stable domestic housing market and a recovery in the cost competitiveness of NCCs over ECCs (thanks to low oil prices). We estimate that the pre-tax profit portions for the firm’s construction and chemical businesses will divide as 70:30 in 2020 and 55:45 in 2021.
Given both a likely drop in plant division sales and one-off item reversals, we forecast that annual consolidated OP will drop to W1.1tn (-5.1% y-y) in 2020 and W1.0tn (-2.4% y-y) in 2021. However, NP (excl minority interests) should reach W0.8tn (+16.5% y-y) this year and W1.0tn (+19.7% y-y) next year on the recognition of equity-method gains for Yeochun NCC and Polymirae (the firm’s major chemical business subsidiaries). Given such, we view the company’s shares (currently trading at a 2020E P/E of 4.0x and P/B of 0.5x) as being undervalued compared to the industry averages (construction: 6x; NCC players: 12x). We maintain Daelim Ind as our top pick for the construction industry.
1Q20 review: Earnings top market expectations
On a consolidated basis, Daelim Ind announced 1Q20 sales of W2.5tn (+8.1% y-y), OP of W290.2bn (+20.5% y-y), and NP (excl minority interests) of W198.9bn (-10.0% y-y), with OP and NP exceeding both our estimates and consensus. Earnings growth was spurred by: 1) an earnings surprise for consolidated subsidiary Samho, which delivered OP of W69.9bn (vs our estimate of W34.9bn); 2) consolidation effects for Korea Development (Dec 2019) and Cariflex (Mar 7, 2020); and 3) the booking of one-off reversal items for the firm’s non-consolidated construction and plant divisions.