2021 Outlook: Upbeat on Housing and New Businesses
The authors are analysts of Shinhan Investment Corp. They can be reached at hyunwook.kim@shinhan.com and yoongu@shinhan.com, respectively. – Ed.
1Q21 preview: Earnings likely solid thanks to housing business
We now expect GS Engineering & Construction to report sales of KRW2.5tr (+2% YoY) and operating profit of KRW224.9bn (+32% YoY) for 1Q21, with solid earnings likely driven by the housing business. Gross margins from housing projects are estimated at 20%, expecting the reversal of contingency reserves on brisk apartment presales and settlement gain upon completion of construction through effective control of raw material and labor costs. Compared with 3Q20 (gross margin reached 23.5%on completion of the Han River Metro Xi project) and 4Q20 (30.5% on completion of Gran City Xi project), gross margins should come in slightly lower and nearer to2Q20levels with most of the large-scale housing projects set for completion in 1Q21 centering on reconstruction and redevelopment instead of new construction.
On the non-operating side, GS Engineering & Construction stands to book FX translation gains in 1Q21 vs. losses in 4Q20 (KRW118.1bn) on the rise in dollar value since the start of the year.
2021 outlook: Upbeat on housing and new businesses
For 2021, we project sales at KRW10.2tr (+0% YoY) and operating profit at KRW976.5bn (+30% YoY). Increasing sales from housing and new businesses (GS Inima Environment and modular construction) should offset impact of the YoY decline in sales from plant/power projects following completion of the GS Caltex MFC project (86% completed as of 4Q20) and the LG Chem petrochemical complex in Yeosu (87%as of 4Q20) within 1H21. Despite stagnant sales, operating profit should visibly increase on top-line growth of high-margin housing construction and new businesses. Meanwhile, an upturn in value of the Brazilian real from current sluggish levels will likely lead to upward revision of forecasts for GS Inima Environment going forward.
Retain BUY for target price of KRW56,000
We retain our BUY rating and target price of KRW56,000,based on 2Q21F-1Q22F BPS and a target PBR of 1.0x(average PBR recorded during the past uptrend in housing sector ROE). Adding to upbeat forecasts for the housing business on brisk presales, GS Engineering & Construction revealed plans for further diversification of new businesses (currently GS Inima Environment and modular construction) to intangible/intellectual property rights sales and small-scale power trade at its recent shareholders' meeting. We find it positive that the company has taken the lead among major domestic builders in adapting to changes in the industry's profit structure. From 2022, long-awaited progress on the new town project in Vietnam should help to improve long-term earnings visibility even further.