1Q20 Results Satisfy Consensus
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Despite the Covid-19 outbreak, Hanwha Corp. displayed sound earnings visibility backed by increased earnings contributions from stable defense-related businesses, including the in-house defense arm and Hanwha Aerospace. The firm’s shares are currently trading at a 52% discount to NAV.
Sound earnings visibility despite Covid-19
Hanwha Corp.’s earnings visibility remains relatively sound despite the Covid-19 outbreak. In particular, we note that defense businesses account for 28% of the firm’s NAV and 33% of its consolidated OP. Thanks to both low-base effect (following an accident in 2019) and the recognition of deferred sales, the in-house defense business should enjoy OP growth (y-y) of 55% in 2020. Profit improvement at Hanwha Solutions has also been confirmed, with its solar business getting on a normal growth track. However, falling interest rates are sapping earnings at Hanwha Life, and Covid-19 is directly impacting Hanwha Hotels & Resorts, partially hindering the firm’s earnings momentum.
1Q20 results satisfy consensus
Hanwha Corp. posted market satisfying 1Q20 sales of W14,461.2bn (+21% y-y) and OP of W296.4bn (+14 y-y).
Non-consolidated OP came in tepid at W6.4bn (-47% y-y), influenced by sluggish results at the in-house trading business. Hanwha E&C also booked sluggish OP of W66.2bn (-24% y-y) due one-off SG&A costs. Owing to Covid-19, sales fell at Hanwha Hotel & Resorts, resulting in an operating loss of W28.5bn (RR y-y). But, such results were offset by strong earnings at Hanwha Solutions and gains from the sale of bonds at Hanwha Life.
In 2Q20, Hanwha Hotel & Resort and the in-house trading business are expected to continue to show sluggish results amid Covid-19. Hanwha Solutions’ solar power business is also likely to display reduced profit. However, on a q-q basis, the firm should book slightly improved 2Q20 OP of W309.8bn (-16% y-y) on: 1) the absence of one-off SG&A costs at Hanwha E&C; and 2) expected stable earnings at defense-related businesses, including the in-house defense arm and Hanwha Aerospace.