Growth Expectations Remain High
The author is an analyst of NH Investment & Securities. He can be reached at jack.baek@nhqv.com. -- Ed.
Insun ENT’s 1Q21 results missed our estimates and consensus. But, landfill ASP for construction waste should rise in 2H21, backed by rising housing start areas and improving construction industry conditions. Also, OPM at the firm’s landfilling domain is to rise on a steepening supply-demand imbalance and a 48% hike (from Jan 2022) in landfill tipping fees by the SLC.
Despite earnings taking breather, growth expectations remain high
Insun ENT’s 1Q21 consolidated sales and OP were held to W53.7bn (+4.3% y-y) and W9.5bn (-23.4% y-y), respectively. The figures missed our estimates and consensus on sharper-than-expected drops in its construction waste disposal and landfilling ASPs. Of note, the firm’s waste disposal fees are usually at their lowest point for the year in 1Q due to off-seasonality. Meanwhile, the decline in landfilling ASP stems from intensifying competition in the market and will likely continue having a negative impact upon OPM throughout this year. Also, 2021 earnings at the Insun ENT’s incineration business are expected to slip slightly (y-y) as orders at its subsidiary Younghung Industry Environment are currently slowing down as the subsidiary prepares for a planned capacity expansion project next year.
However, we believe that these negatives should be viewed as part of a transition process to lay a path for significant earnings improvement in 2022 and further growth over the longer haul for the following three reasons. First, Insun ENT’s construction waste disposal ASP is set to climb throughout 2H21 in response to expanding new housing start areas. Second, the firm’s landfilling ASP should increase in line with a 48% hike in landfill tipping fees by the SLC by 48% from January next year. Currently sitting at around W160,000/ton, the company’s blended general and designated waste landfilling ASP should rise to around W190,000/ton next year. Third and finally, Insun ENT’s incineration business is forecasted to show OPM of more than 30% down the road following completion of the slated capacity expansion project in 2022.
We have downwardly adjusted our 2021 earnings estimates, now expecting sales of W234.1bn (+12.2% y-y) and OP of W50.1bn (+2.3% y-y). That said, sales and OP should rebound to W262.3bn (+12.1% y-y) and W59.4bn (+18.5% y-y), respectively, in 2022. Thus, believing that the company’s temporary earnings trough will only last up to 1H21, we adhere to a Buy rating.
OPM at scrapped car recycling business to rebound on rising scrap metal price
OPM at Insun ENT’s scrapped car recycling business is primed to improve thanks to a surging iron scrap metal price (W280/kg in Jan, 2020 → W420/kg in Jan, 2021). Of note, the firm’s subsidiary Insun Motors (100% stake) is the largest scrapped car player in Korea, boasting capacity to deal with 240,000 tons worth of scrap cars pa. Although the subsidiary made no contributions in terms of OP last year, its portion of overall OP should reach 7% this year.