Refinery (GS Caltex) Earnings Tepid
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Despite weak earnings at its refinery business (GS Caltex), GS Holdings’ quarterly OP volatility continues to lessen on: 1) petrochemical facility capacity expansion; 2) stable growth at IPP affiliates; and 3) margin improvement at GS Retail. GS Holdings’ shares are trading at a 54% discount to NAV.
Positively view strengthening in business portfolio synergy effects despite tepid refinery (GS Caltex) earnings
Despite weak earnings at its refinery arm (GS Caltex), GS Holdings’ quarterly OP volatility continues to lessen on: 1) higher petrochemical facility capacity; 2) stable growth at IPP affiliates; and 3) better margins at GS Retail. GS Holdings should continue to enjoy reduced OP volatility going forward, and it boasts promising mid/long-term growth prospects, fueled by: 1) petrochemical facility capacity expansion at both GS Caltex (Olefin plant to be completed in 2022) and GS Energy (operations at petrochemical JV with Lotte Chemical to start in 2022); and 2) full-year reflection of earnings for GS E&R’s Pocheon community energy plant, and the planned beginning of operations at GS EPS’s biomass power plant #2 (105MW) in 4Q20. Meanwhile, following the recent inauguration of Chairman Heo Tae-soo, GS Holdings will likely further beef up its business portfolio via entry into new growth ventures.
1Q20 review: Large-scale inventory valuation losses at GS Caltex vs earnings surprise at GS Retail
GS Holdings posted 1Q20 sales of W4,196.1bn (-5% y-y) and consensus-missing OP of W9.5bn (-98% y-y).
Operating losses at GS Caltex totaled W1,031.9bn (TTL y-y), influenced by the reflection of large-scale inventory valuation losses (W900bn) amid a rapid drop in oil prices. The 1Q20 results for IPP subsidiaries also proved sluggish. In line with a weak SMP (W83/kWh, -24% y-y), OP at GS EPS fell to W33.6bn (-36% y-y) amid a temporary drop in sales for RECs. Weighed upon by a lowered settlement coefficient (regarding coal prices), GS E&R posted languid OP of W58.5 (-29% y-y). But, partially offsetting above-noted negatives, GS Retail delivered an earnings surprise (OP of W88.8bn, +315% y-y) on increased operating efficiency at its supermarket division.
Looking at 2Q20, GS Holdings should show OP of W419.1bn (-14% y-y), returning near to past levels on: 1) likely reduced (q-q) inventory valuation losses at GS Caltex; 2) anticipated further earnings improvement at GS Retail; and 3) the absence of one-off negatives booked in 1Q20 for IPP subsidiaries.