To Enjoy Comfortable Earnings Performance

The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.  

 

Pre-sale for IS Dongseo’s Deokha Ulsan in-house project is scheduled for Mar 2021, and is to be followed in 2H21 by pre-sale for the Jungsan Gyeongsan and Deokeun Goyang in-house projects. Based on 2021E and 2022F earnings, the firm’s TP is equivalent to 2021E and 2022F P/Es of 10x and 7x, respectively, levels which we consider attractive when taking into account its environment/waste management subsidiaries (including Insun ENT and Koentec) in addition to its in-house construction projects.

To enjoy comfortable earnings performance

We maintain a Buy rating and a TP of W66,000 on IS Dongseo. The project values for the company’s Deokeun Goyang, Jungsan Gyeongsan, and Deokeun Goyang in-house projects are all to exceed existing real estate value estimates once projects get underway. As these real estate holdings were purchased before 2018, business feasibility is already secured (based on the current housing prices) even at a pre-sale rate of only 50%. Of note, we are currently reflecting the real estate value for the firm’s Deokeun Goyang and Jungsan Gyeongsan in-house projects on an acquisition price basis, but once pre-sale in these districts begins, we will (similar to the case for the Deokha Ulsan project) reflect their project values (which also take into account the values of the real estate properties on a market price basis).

The firm posted consolidated 4Q20 sales of W338.6bn (+40% y-y) and OP of W51.3bn (+83% y-y), with OP coming in slightly below consensus and our estimate on: 1) losses at its concrete and shipping businesses; and 2) a slight widening in the portion of sales from contract-based projects in the construction division. But, with earnings for Youngheung Industry Environment and Paju B&R starting to be reflected (from 4Q20), sales upped W10.0bn y-y and OP climbed W2.0bn y-y.

Steadily increasing cash holdings to finance new businesses

IS Dongseo’s net debt has averaged W700bn since 1Q18, evidencing its active land purchasing and M&A activity. Over the past three years, the firm has purchased land in Jungsan Gyeongsan (105,785m2, W400bn) and Deokha Ulsan (79,339m2, W110bn) for in-house construction projects, and it has acquired Insun ENT, Koentec, Yeongheung Industry Environment, and Paju B&R (for W150bn, W150bn, and W70bn, respectively). We forecast that annual overall OP will reach W315.0bn (+53% y-y) in 2021 and W442.9bn (+41% y-y) in 2022, noting that in addition to projects in progress, the Dongdaegu Eileen’s Garden project (W322bn, 4Q21), the DMC Deokeun Goyang Eileen’s Garden project (W140bn, 2Q22), and Anyang IS BIZ Tower (W350bn, 1H22) are all to be reflected in sales on a delivery basis.

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