Energy Materials Division Records Strong Rebound
The author is an analyst of Shinhan Investment Corp. He can be reached at yjjung86@shinhan.com. -- Ed.
2Q21 OP of KRW35.6bn (+773.8% YoY) meets market expectations
POSCO Chemical posted operating profit of KRW35.6bn (+773.8% YoY) on sales of KRW480bn (+41.1% YoY)for2Q21, meeting the market consensus of KRW34.6bn. The energy materials division recorded a strong rebound, with sales up by 122.6% YoY to KRW210.5bn and operating profit estimated to have risen in mid-single digits.
Refractories and quicklime/chemicals supplied to captive clients accounted for most of the company’s earnings until last year. The new energy materials business turned profitable in 2H20, but its contribution to consolidated earnings had been marginal. In 2Q21, it raked in enough profit to offset the weak performance of refractories that had been hit by declines in capacity utilization rates at clients. Energy materials are on a steep growth track in terms of both sales and profit.
Earnings improvement and growth momentum justify high valuations
The cathode materials business has secured its market footing faster than expected. The equity method subsidiary PMC Tech continued to report solid results. With electric furnaces in China running at full capacity, needle coke prices are hovering around USD1,000-1,100 per ton, up by more than 50% from last year’s bottom. Strong demand for needle cokes in China should continue through 2H21.
POSCO Chemical will likely announce plans for further capacity expansion for energy materials at home and abroad in 2H21. A timely investment needs to be made given increasing client needs for local sourcing of materials and EV release schedules. We pay attention to earnings and growth momentum that justify the company’s high valuation multiples.
Retain BUY and raise target price by 17.6% to KRW200,000
We retain our BUY rating on POSCO Chemical and raise our target price by 17.6% to KRW200,000, based on 2023F EBITDA and a target EV/EBITDA of 39.4x. The first phase of facility expansion for energy materials is slated to be completed in 2023. Large-scale capacity additions and high visibility of earnings growth enable us to make projections for 2023.