Annual Order Guidance Likely to Be Met
The author is an analyst of KB Securities. He can be reached at moonjoon.chang@kbfg.com. -- Ed.
3Q20 earnings surprise backed by Housing/Building GPM improvement
- GS E&C reported 3Q20P revenue of KRW2.32tn (-5.0% YoY/-8.9% QoQ), OP of KRW210.3bn (+12.1% YoY/+27.4% QoQ) and NP (attributable to controlling interests) of KRW90.1bn (-47.7% YoY/+12.2% QoQ).
- Revenue came in lower than the market consensus, but OP was higher.
- Typhoons and frequent rain weighed on domestic revenue, while COVID-19 undermined performance for new business and overseas business.
- Defying sluggish revenue, GPM for Housing/Building improved, reaching 23.5% because of: (1) completed new-build projects; (2) stabilizing building material prices, which sent OP above the market consensus (Housing revenue at KRW1.14tn; 25.2% GPM).
- This year’s unusually high Housing GPM has been attributable to a concentration of completed large-project orders that were presold during 2017-18.
- NP (attributable to controlling interests) fell short of the market consensus because of a KRW50.0bn FX translation loss due to won appreciation.
- We expect to see revenue/OP growth in 2021 based on the following: (1) there is a high possibility that housing supply will surpass annual guidance; (2) Housing/Building GPM should continue to remain high; (3) there is high visibility in New Business’ growing revenue.
3Q20 cumulative domestic housing supply at 22,221 households (annual guidance likely to be surpassed)
As of 3Q20, cumulative domestic housing supply was at 22,221 households (vs. 14,500 households in 2Q20). Given this, we think this year’s guidance of 25,641 households will most likely be surpassed.
3Q20 cumulative order wins total KRW7.5tn (domestic: KRW6.3tn; overseas: KRW1.2tn) vs. annual domestic/overseas guidance of KRW8.25tn/KRW3.25tn
3Q20 domestic order wins, particularly for housing, was solid, coming in at KRW2.3tn. There is no reason to expect annual order guidance not to be met.
Expect Revenue/OP growth in 2021
- Profit margins for Housing/Building improved markedly on the completed large project orders this year. Growth in 2020 should dwarf that of 2021, but, taking into account expected rebounds in revenue starting in 4Q20, we still expect earnings improvement next year.
- New Business is growing slower than expected, but growth should continue considering: (1) full 12-month’s earnings contribution in 2021; (2) water-treatment subsidiary Inima’s push for large project orders.
- Given New Business’ potential to stabilize earnings, we think GS E&C holds mid-/long-term investment merit.