Asset Sales to Restrict Dividend Distributions
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Despite solid in-house earnings and the strong growth potential of newly established subsidiaries, Doosan Corp’s shares have performed sluggishly as of late due to repeated liquidity issues at an affiliate, DHIC. Believing that measures to resolve the current liquidity crisis (ie, disposal of assets/businesses) will eventually translate into weaker top-line growth, we maintain a Hold rating for now.
Dividend fears arise amidst liquidity crunch at affiliate DHIC
In order to resolve the liquidity crisis faced by its affiliate Doosan Heavy Industries & Construction (DHIC), Doosan Group has been moving towards disposing of Doosan Corp and DHIC’s assets and business units. In detail, Doosan Corp recently announced that it has signed an MOU to sell its stake in Doosan Solus (18%). Disposals of Doosan Tower and Mottrol have also been discussed. Of note, Doosan Corp has offered collateral (including its DHIC stake) for a loan extension. The amount of the collateral was initially sized at W664.6bn, but it jumped to W1,132.7bn following recent share price upswings.
While liquidity crisis-resolving measures (ie, disposal of assets/businesses) should ease DHIC-related uncertainties, we believe that such moves will eventually translate into weaker top-line growth for Doosan Group. We note that Doosan Tower (distribution arm) and Mottrol represent as much as 27% out of Doosan Corp’s in-house business OP. Accordingly, the disposals of them are eventually to restrict Doosan Corp’s dividend distributions.
2Q20 preview: To book sound in-house business earnings
Doosan Corp should book consolidated 2Q20 sales of W5,087.1bn (+2% y-y) and OP of W506.8bn (+11% y-y). Despite the impact of Covid-19, its in-house businesses likely delivered solid OP of W54.6bn (-2% y-y, including overseas subsidiaries). Excluding the industrial vehicle arm, for which we estimate that OP likely dropped to W6.2bn (-73% y-y) on reduced operations due to decreased demand in the US and Europe amid Covid-19, Doosan Corp’s in-house businesses
likely fared well overall.
In 3Q20, in-house businesses are likely to sustain healthy performances, booking OP of W56.7bn (+12% y-y). But, once Doosan Tower and Mottrol are sold, related earnings are to be reflected as discontinued operations.