Global Order Backlog to Decrease 6.7% YoY in 2021
The author is an analyst of Shinhan Investment Corp. He can be reached at eoyeon.hwang@shinhan.com. -- Ed.
2021outlook: Operating profit of KRW59.4bn (-58.5% YoY)
Korea Shipbuilding & Offshore Engineering (KSOE) is expected to post sales of KRW16tr (+7.7% YoY) and operating profit of KRW59.4bn (-58.4% YoY) for 2021. Sales are set to grow with increasing deliveries on orders secured in large numbers during 2018-2019.
Operating profit is projected to fall 58.4% YoY due to: 1) newbuilding price declines on shrinking global order backlog; 2) drop in the USD/KRW rate; and 3) potential rise in heavy plate prices. As in 2017, construction loss provisions should increase through the first half of this year.
Focus on relative strength in order intake rather than short-term earnings; global order backlog to decrease 6.7% YoY in 2021
Global order backlog is forecast to drop 6.7% YoY to 150mn DWT in 2021. Global order placements should visibly recover 48.2% YoY to 80mn DWT, but will likely be outnumbered by deliveries of 90mn DWT (+2.6% YoY).
During the same period, KSOE will likely see order intake increase 36% YoY to USD16.77bn and order backlog climb 7.3% YoY to USD35.11bn. Order backlog growth should be driven by strong competitiveness in LNG-fueled vessels, which account for 28.8% of the backlog. We believe stable order inflow in 2021 will lead to a visible hike in newbuilding prices from 2022.
Retain BUY and raise target price to KRW125,000
We retain our BUY rating on KSOE and raise our target price to KRW125,000, based on 2021F BPS of KRW159,573 and a target PBR of 0.77x (20% discount to the PBR high recorded during order intake recovery in 2017). The discount is inevitable as the company, the intermediate holding company for Hyundai Heavy Industries (HHI) Group’s shipbuilding operations, should be negatively affected by the planned IPO of HHI and Hyundai Samho Heavy Industries.
Last year, HHI signed a deal with Korea Development Bank (KDB) to take over Daewoo Shipbuilding & Marine Engineering (DSME). Under the deal, HHI promised to: 1) provide KDB with KRW1.25tr worth of redeemable convertible preference shares (RCPS) and 7% of ordinary shares in the intermediate holding company KSOE; and 2) conduct a rights offering worth KRW1.25tr for DSME. Depending on the RCPS conversion rate, we expect a dilution of 17.6-25.5% and BPS drop of 4-6%. With shipbuilding market conditions set to recover in 2021-2022, the acquisition of DSME should help KSOE to strengthen cost competitiveness and further heighten order intake capabilities through improvement in R&D efficiency.