Stands to Benefit from Green New Deal Projects
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Copper prices, which show a high correlation with LS Holdings’ share price, are improving. Going forward, we expect the firm’s earnings growth to be led by rising copper prices and mid/long-term benefits from the sale of submarine cables at LS C&S, in accordance with the government’s plan to expand offshore wind power. The shares are currently trading at a 54% discount to NAV.
Earnings at affiliates improving alongside copper price hikes
Despite weak copper prices following the outbreak of Covid-19, LS Holdings’ earnings were supported by subsidiaries such as LS Cable & System (thanks to strong HV line sales) and LS Nikko Copper (strong by-product sales). However, with the price of copper recently skyrocketing, other subsidiaries whose main businesses are related to copper, are also reporting rapid earnings improvement.
Demand for LS Cable & System’s submarine cables should accelerate in line with: 1) the government’s plan to expand offshore wind power in line with the Green New Deal; and 2) the completion of the firm’s new plant in Donghae (Plant #2) to keep pace with strong overseas demand. In addition, the establishment of a JV for EV cables between LS I&D and Furukawa Electric in Japan, rising expectations for the listing of sub-subsidiary LS EV Korea following the recovery of the stock market, and the possibility of an increase in DPS are all positive for the stock. The company’s shares are currently trading at a 54% discount to NAV.
3Q20 results led by copper price hike
LS Holdings booked consolidated 3Q20 sales of W2,569.8bn (+3% y-y) and OP of W123.8bn (+26% y-y), exceeding consensus thanks to strong copper prices. The cable business reported strengthened earnings in line with higher average copper prices (+22% q-q, +12% y-y). Despite delays in a North American telecom project due to Covid-19, LS I&D’s earnings rebounded (OP of W26bn, TTP y-y) as its top-line expanded on the strong copper prices. Despite the arrival of a low season for domestic tractors, LS Mtron recorded OP (W6.1bn, TTP y-y) in 3Q20 for the first time since 2016, driven by strong overseas tractor sales, an earnings turnaround for electronic parts, and a reduction in losses for injection molding machines. Despite some delays in sales for HV cables and submarine cables, LS Cable & System’s earnings (OP of W42.1bn, +12% y-y) met our estimates thanks to strong copper prices. LS Nikko Copper also posted solid earnings (OP of W63.7bn, -10% y-y) on increased by-product sales and fading negatives at the electrolytic copper cathode business.
With copper prices remaining strong in 4Q20, the firm’s OP should reach W137.7bn (+319% y-y) on the recognition of delayed sales at LS Cable and the elimination of one-off costs at LS Electric.