Earnings Volatility to Ease Gradually
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Earnings visibility at GS Holdings’ major subsidiary, GS Caltex, is on the decline. But, earnings volatility at the holding company should ease going forward via: 1) petrochemical business and IPP expansions; 2) GS Retail-GS Home Shopping M&A synergies; and 3) promotion of new growth businesses.
Earnings volatility to ease gradually
Earnings visibility for GS Caltex’s oil refining business has lessened significantly due to the Covid-19 crisis. But, we expect earnings volatility at GS Holdings to ease moving ahead on: 1) anticipated expansion of its petrochemical business from 2H21; 2) higher independent power producer (IPP) sales; 3) GS Retail-GS Home Shopping M&A synergies; 4) the establishment of Corporate Venture Capital (CVC); and 5) promotion of new growth businesses.
Although maintaining a Hold rating, we raise our TP on GS Holdings from W41,000 to W46,000, reflecting: 1) changes in listed affiliates’ share prices; 2) adjustments to our earnings estimates for GS Caltex (however, we maintain our applied P/B multiple at 0.6x); and 3) a boosted stake in GS Power (50% → 100%). GS Holdings’ shares are currently trading at 52% discount to NAV.
4Q20 preview: To show solid earnings for IPPs
We believe that GS Holdings’ 4Q20 earnings will arrive above consensus, estimating sales of W4.28tn (-1% y-y) and OP of W326.4bn (-32% y-y).
With the possibility of reflecting inventory valuation gains remaining low (on a q-q lessening in oil price volatility and weakened refining margins), GS Caltex should record 4Q20 OP of W12.6bn (-87% y-y). However, despite a weak SMP (W56/kWh, -34% y-y), IPP affiliates will likely record solid earnings thanks both to the start of operations at GS EPS’s biomass power plant #2 and strong earnings at GS Power’s collective energy business.
For 1Q21, we expect GS Holdings’ OP to reach W412.5bn (+4,260% y-y), helped by: 1) an increased stake in GS Power and an accompanying inclusion of GS Power in consolidated earnings; 2) likely earnings improvement at IPP affiliates on a recovery in SMP (which tends to lag oil price movements); and 3) an anticipated reversal of inventory valuation losses at GS Caltex.