Full-year Order Intake Projected at US$15.3bn
The author is an analyst of Shinhan Investment Corp. He can be reached at eoyeon.hwang@shinhan.com. -- ED.
1Q20 review: OP exceeds consensus estimate by 61% at KRW121.7bn (-28% QoQ)
Korea Shipbuilding & Offshore Engineering posted operating profit of KRW121.7bn (-28.4% QoQ) on sales of KRW3.9tr (-9.2% QoQ) for 1Q20, beating market expectations of KRW75.7bn by 60.9%. Stronger-than-expected results were driven by: 1) the increase in USD/KRW exchange rate; and 2) price adjustment for steel plates. One-off gains of KRW102.9bn were booked with project cost estimates down-adjusted in reflection of the increase in USD/KRW exchange rate (+5.3% YoY). In addition, price estimates for steel plates slated for use in 2020-2022 were downward revised by 4%, leading to additional one-off gains of KRW40.3bn. On the non-operating side, one-offs included gains of KRW79.4bn from the sale of Seobu facilities and costs of KRW10bn booked for idle facilities (offshore and Gunsan shipyard).
Operating profit fell 28.4% on a QoQ basis with the base raised from the KRW231.6bn NSAR2 change order booked in 4Q19. Merchant vessel order intake came to USD1.2bn (+7.1% YoY, equals 7.9% of company guidance for the full year) for 1Q20. Major order placements for LNG carriers were postponed to 2Q20 due to the COVID-19 pandemic.
2020 outlook: Sales KRW16tr (+8% YoY), order intake USD15.3bn (+4% YoY)
For 2020, we forecast sales at KRW16.5tr (+8.4% YoY) and operating profit at KRW199.4bn (-29.7% YoY). Sales growth should continue with order backlog on a steady uptrend since 2018. Full-year order intake is projected at USD15.3bn (4.1% YoY) including orders for 27 LNG carriers. Order placements for major LNG carrier projects (16 from Mozambique, 10 from Arctic 2, 40-80 from Qatar) will likely proceed as expected in 2Q20. Despite the rise in uncertainties for offshore projects due to the plunge in oil prices, we expect Korea Shipbuilding & Offshore Engineering to post YoY growth in offshore orders from participation in the Myanmar Shwe Phase 3 project (USD1bn) and Saudi Aramco long-term agreement (LTA) program.
Retain BUY for a target price of KRW110,000
We retain our BUY rating on Korea Shipbuilding & Offshore Engineering for a target price of KRW110,000, based on the 12-month forward BPS forecast of KRW164,460 and a target PBR of 0.7x. With LNG carrier delivery slots open from 2023 and annual production capacity reaching 20 vessels (largest among the three domestic shipbuilders), Korea Shipbuilding & Offshore Engineering is expected to secure large-scale orders in May-June and should see a rally of shares on news of order intake.