Sales of Automobile Steel Plates Recovering
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
Despite the effects of Covid-19, Hyundai Steel’s consolidated 2Q20 operating income turned positive. Even if not rapid, the firm’s earnings growth is expected to pick up gradually going forward on a sales recovery for automobile steel plate. We advise taking the company’s exceptionally low P/B multiple into consideration when looking for investment opportunities.
OP achieved in 2Q20 on relatively favorable electric furnace business
On a provisional basis, Hyundai Steel (004020.KS) posted consolidated 2Q20 sales of W4,113.3bn (-26.2% y-y), OP of W14bn (-94.0% y-y), and a net loss (excluding minority interests) of W11bn (TTL y-y), with operating income turning to profit after two consecutive quarters of operating loss. While sales arrived 8.0% short of consensus, OP solidly outperformed the market expectation of a W21bn operating loss.
Although Hyundai Steel’s non-consolidated OP fell y-y to W9.2bn (-95.8% y-y), the figure turned to surplus q-q. At the blast furnace division, sales of CR products (mainly used for automobiles) decreased 23.8% q-q, and ASP fell by roughly W40,000/ton. At the electric furnace division, profitability improved on rising product prices, narrowing scrap prices, and the suspension of operations at low-margin HR sheet facilities. Despite coming in sluggish due to low utilization rates amid Covid-19, OP at overseas subsidiaries contributed to an increase in consolidated profits, backed by the reflection of unrealized gains.
Hike 2021F and 2022F OP by 12.0% and 10.3%, respectively
We estimate Hyundai Steel’s 2020 consolidated OP at W61.7bn (-81.4% y-y), forecasting 2021F and 2022F OP of W388.6bn (+529.7% y-y) and W412.8bn (+6.2% y-y), respectively. With our OP estimates for 2021 and 2022 hiked by 12.0% and 10.3%, respectively, versus our previous projections on expectations for a gradual recovery in automobile steel plate sales, we raise our TP to W31,000. Of note, our new TP corresponds to a 2020E~2021F average P/B of only 0.25x.
We expect the company to log consolidated 3Q20 OP of W14.2bn (-58.4% y-y) and 4Q20 OP of W63.2bn (TTP y-y). In 3Q20, automobile steel plate sales are anticipated to rise by 200,000 tons q-q, but sales of long steel products are likely to decline 6.8% due to off-season effects.