Weak Results Stemming from Restructuring Costs
The author is an analyst of KB Securities. He can be reached at moonjoon.chang@kbfg.com. -- Ed.
Maintain BUY and target price of KRW56,500
We maintain BUY and our TP of KRW56,500 (1.0x 12m fwd P/B) for GS E&C. We lowered our earnings expectations for the year because of unexpected costs stemming from organizational restructuring (regarding plant employees). However, investment appeal should grow over the mid/long term, as we expect the following:
(1) Transition into a new business model with greater focus on domestic housing, new biz and infrastructure
(2) Reduced labor costs by at least KRW50.0bn annually starting in 2022
The stock’s lackluster performance since May has left it at only 0.78x 12m fwd P/B, 6.1x P/E. We recommend accumulating shares. GS E&C is our industry top pick.
2Q21 preview: Weak results stemming from restructuring costs
For 2Q21, we forecast consolidated revenue at KRW2.49tn (-2.4% YoY, +23.7% QoQ) and OP at KRW107.7bn (-34.8% YoY, -39.1% QoQ), which is far below the market consensus. Top-line performance should continue to be on par with that of 2Q20, as a reduction in Plant revenue should offset rebounding revenue for Building/Housing; also, Plant restructuring costs (~KRW100.0bn) should weigh on OP. We expect Building/Housing revenue to improve in earnest starting in 3Q21.
1H21 cumulative housing supply estimated at 11,000 homes
We estimate GS E&C’s 1H21 cumulative housing supply to be 11,000 homes (vs. annual target of 32,000 homes). The company appears to have pushed back presales for some of its redevelopment projects in anticipation of higher presale prices amid surging demand for new apartments.
Therefore, the company looks highly likely to supply presale apartments in 2H21 to make up for the lull in 1H21.
Overseas order book of ~KRW0.6tn in 1H21; likely to exceed KRW4tn in 3Q21
1H21 cumulative overseas order intake stands at a weak ~KRW0.6tn (vs. annual target of KRW5.1tn). However, we expect the overseas order book to surpass KRW4.0tn in 3Q21 given Australia’s NEL project (KRW2.5tn)—for which GS E&C has recently been selected as a preferred bidder—and the remainder of Oman’s desalination project (KRW1.4tn), which is to be recognized as earnings once financing is complete around Jul-Aug.