Half of Sales Come from Recurring IT Outsourcing Services
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Owing to the spread of Covid-19, new SI projects have been delayed. However, as half of Hyundai Autoever’s sales come from recurring IT outsourcing services, strong earnings are anticipated in the near term. We believe that expectations for healthy mid/long-term earnings remain valid, favorably viewing the firm’s strategic growth business amid clients’ accelerating digital transformation.
Fundamentals solid despite Covid-19; expect mid/long-term growth moving forward
While new system integration (SI) projects have been delayed due to Covid-19, IT outsourcing services (57% of overall sales) remain essential to the firm’s clients, as they are key to sustaining stable business performances. We expect earnings at the ITO division to strengthen as IT employees from domestic and overseas affiliates are due to be integrated by end-2021.
Moving ahead, we forecast a Covid-19 crisis-spurred acceleration in the move towards digitalization, including higher demand for both cloud services and non-face-to-face working environments. Likely to be part of this growth are opportunities being presented under the comprehensive Korean New Deal plans, including the strengthening of Data Network AI (DNA) ecosystems and K-cyber security. Over the mid/long term, Hyundai Autoever should enjoy strengthening earnings growth and margin improvement, backed by higher sales contributions from its strategic businesses, including the Global One-IT, smart factory, smart building/home, and smart mobility domains.
2Q20 results: strong profitability despite Covid-19
Hyundai Autoever booked 2Q20 sales of W390.8 (-4% y-y) and OP of W26.5bn (+16% y-y), with sales coming below our estimate and OP topping our forecast. Although sales decreased owing to Covid-19, OP was favorable thanks to cost reductions and an improved product mix.
The SI division booked sales of W164.9bn (-8% y-y), showing a y-y slowdown as overseas SI projects were delayed amid Covid-19. The ITO division displayed a slight decrease in sales despite high-base effect. Meanwhile, thanks to: 1) continued IT employee integration at overseas affiliates (Hyundai Mobis, Hyundai Glovis, and Hyundai Transys located in Russia, Czech Republic, and Slovakia); and 2) cost reductions backed by increased telecommuting amid Covid-19, the ITO division booked strong OP of W26.5bn (+16% y-y, OPM of 6.8%, +1.2%p y-y).
We forecast 3Q20 OP of W23.9bn (+16% y-y), with strong earnings growth at the ITO division thanks to the integration of IT personnel at overseas affiliates offsetting the negative impacts of Covid-19 and low seasonality.