Large Builders' Housing Market Share Rising
The author is an analyst of KB Securities. He can be reached at moonjoon.chang@kbfg.com. -- Ed.
Retain BUY; TP raised to KRW56,500
We reiterate BUY on GS E&C and raise our TP by 17.0% to KRW56,500 to reflect a rise in ROE (8.11%→9.16%). ROE has been revised up, given: (1) rising housing market share of large builders; (2) potential increase in housing supply over the medium term; and (3) adjustments to GS E&C’s long-term profitability projections considering the full-fledged growth by the company’s new business segments. Our estimates for NP attributable to controlling interests has been revised down by 2.3% for 2021, but bumped up by 4.1%, 6.4%, and 8.1%, respectively, for 2022-2024. Our revised TP is based on 12m fwd P/B multiple of 1.0x. While sector-wide re-rating of shares is to be expected given improvements in market conditions, we continue to favor GS E&C as our top pick, given the company’s stabilizing earnings and active ventures into new businesses.
Share re-rating imminent, given earnings stabilization and improvements in market conditions
We believe 2021 will mark the beginning of share re-ratings for large builders like GS E&C. GS E&C shares have been trading no higher than 0.7x-0.8x 12m fwd P/B since 2013 (except for 2018-2019). Valuation of GS E&C remained low during this stretch since the necessary conditions—earnings stabilization and improvements in market conditions—had not coincided. We believe the situation to be different this time. It has been proven time and again that housing construction is a lucrative business. In the case of large-sized construction companies, gains in the company’s housing market share alone would be enough to sustain growth in earnings for the next few years. However, we see potential for an increase in overall housing supply (i.e., pre-sale volume) as well. Given such conditions, shares in GS E&C appear ripe for re-rating.
Actively engaged in securing non-cyclical recurring income streams; Value of GS Inima estimated at KRW1.0tn-KRW1.4tn
The company’s active pursuit of new-growth businesses is another investment point. GS E&C is currently in the midst of preparing for the IPO of wholly-owned subsidiary, GS Inima Environment S.A. (a water treatment company based in Spain). We estimate GS Inima’s enterprise value at KRW1.0tn-KRW1.4tn. (See Mar 16, 2021 report, “New-Growth Businesses to See Light.”) The securing of new businesses that are to some extent impervious to economic fluctuations remains a key task for Korean construction companies. GS E&C stands out it in that it has been most active in its pursuit of non-cyclical recurring income streams (i.e., water treatment).