Earnings Improvement to Continue in 2Q21

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 improvement driven by flat products

Hyundai Steel is expected to have posted operating profit of KRW121.7bn (positive swing YoY) on sales of KRW5.1tr (+9% YoY) for 1Q21. Despite solid sales, operating profit should have missed the market consensus. Sales of steel products are estimated at 3mn tons (-90,000 tons QoQ) from blast furnaces and 1.92mn tons (-80,000 tons QoQ) from electric furnaces, which are better than the projection provided during the 4Q20 earnings call. A significant rise in ASP was recorded for products in the distribution channel and exports. While steel scrap prices rose sharply, rebar price gains were limited by the list price for rebars, causing operating profit to fall short of the consensus.

2Q21 outlook: 1) Rebar ASP hike, 2) higher contract prices expected for CRC and heavy plate

Earnings improvement should continue in 2Q21, led by increases in rebar list price and contract prices. The rebar list price is set based on the scrap price level of the previous quarter and market conditions. A surge in the feedstock price in 1Q should be factored into the list price in 2Q. Scrap prices are estimated to have jumped by 30% QoQ in 1Q. Rebar demand should continue to grow given brisk apartment presales since 2019. The prospects are positive for apartment presales this year.

We also hold an upbeat outlook on higher contract prices for CRC and heavy plate. ASP of heavy plate should be raised from 2Q. Higher CRC and feedstock prices at home and abroad will likely put Hyundai Steel at an advantage in price negotiations with automotive affiliates.

Target price raised to KRW60,000; steel sector top pick

Our target price for Hyundai Steel is raised from KRW57,000 to KRW60,000based on our earnings forecast upgrade. We applied a target PBR of 0.47x (average PBR recorded in 2016-2017) to 2Q21-1Q22F BPS. We recommend Hyundai Steel as our top pick in the steel sector given its focus on improving domestic operations amid overseas uncertainties (steel supply in China, resurgence of COVID-19 cases in Europe). Earnings forecasts may be revised up further depending on the apartment presale trend this year and increase in contract prices for automotive steel plates.

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