Order Market Conditions Improving
The authors are analysts of Shinhan Investment Corp. They can be reached at hyunwook.kim@shinhan.com and yoongu@shinhan.com, respectively. – Ed.
Order market conditions improving with oil price hikes
Samsung Engineering announced order intake guidance of KRW6.0tr (-38% YoY) for 2021 during the 4Q20 earnings call. Its guidance for overseas order intake is KRW3.5tr, assuming oil price of USD47/bbl. The company had won overseas orders worth KRW5.5tr in 2020, vs. its KRW7.5-8.0tr guidance provided at the start of the year. This year’s figure pales in comparison, reflecting the uncertain order market environment.
However, oil prices have almost recovered to pre-COVID-19 levels in the early months of 2021. Crude oil rose to the mid-USD60 level due to cold spells in North America, OPEC plus countries’ agreement to extend oil output cutback, and expectations for economic recovery. While orders do not grow in proportion to the increase in oil prices, we believe the overall order market conditions are looking positive with the crude now approaching the fiscal breakeven prices for major oil producers.
2021 outlook: Sales of KRW7.1tr (+6% YoY), OP of KRW397.9bn (+13% YoY)
For 2021, Samsung Engineering is forecast to earn sales of KRW7.1tr (+6% YoY) and operating profit of KRW397.9bn (+13% YoY). Sales from chemical and non-chemical engineering businesses are estimated at KRW3.7tr (+10% YoY) and KRW3.5tr (+2% YoY), respectively, assuming a COGS ratio of 91.3% and 88%. We assumed that annual order intake will exceed the guidance (KRW6.0tr) at KRW7.2tr. Major order pipelines for 2021 include UAE’s Hail and Ghasha gas projects (package 2-4, USD4bn), Saudi Arabia’s Advanced Petrochemical PDH/PP project (USD1bn), and Korea’s waste incineration and water treatment plant project (KRW0.6tr).
Upgrade to BUY and raise target price to KRW19,000
We upgrade Samsung Engineering to a BUY rating and revise up our target price by 46% from KRW13,000 to KRW19,000. Our revised target is calculated by applying 2021F global peer average PBR of 2.0x (ROE of 15.4%) to 2021F BPS of KRW9,526.
The shares are trading at a 12-month forward PBR of 1.3x, still below the PBR low of 2.0x seen before the pandemic. The pace of recovery is slow considering that oil prices are bouncing back to pre-COVID-19 levels. We expect an uptrend this year as order market conditions improve with oil price hikes.