Additional M&A + Policy Momentum Expected from Sept.
The authors are analysts of Shinhan Investment Corp. They can be reached at eoyeon.hwang@shinhan.com and younghoon.song@shinhan.com, respectively. – Ed.
2Q21 OP in line with consensus at KRW28.2bn (+16.7%YoY)
CS Wind posted operating profit of KRW28.2bn (+16.7% YoY) on sales of KRW279bn (+15.9%) for 2Q21, meeting the consensus estimate of KRW30.2bn. Sales continued upward on the increased order intake (+27.5% YoY) of 2020. This year, cumulative orders reached USD780mn as of July and are expected to exceed last year’s total order intake of USD830mn by 3Q21.
Operating margin remained solid at 10.1% (unchanged YoY) in 2Q21 despite the 51.3% YoY price hike for heavy plates, which account for 60% of total costs. The company has passed on most of the heavy plate price increases to new contracts, and has well-managed the risk of margin declines that can be caused by the time gap between the signing of a new contract and purchase of heavy plates for the order.
Additional M&A + policy momentum expected from September
Current plans set by wind power developers point toward a decline in new wind turbine installations in 2022 by 13.6% YoY globally (excluding China) and by 45.7% YoY in North America. However, CS Wind is expected to stand out on earnings growth vs. peers, backed by the acquisition of wind tower production facilities in central US (capacity: KRW500bn-600bn) and Europe (KRW30bn-40bn) that have already secured ample orders. The company is likely to seek additional M&A deals in Southeast Asia and the US in 4Q21.
The Biden administration, in order to meet the pledge of installing 60,000 wind turbines within 2021-2025, will include production tax credit (PTC) and investment tax credit (ITC) extensions in the USD3.5tr infrastructure bill that will be put up for discussion in September. Approval of the tax credits should spark a rebound in new wind installations in North America and worldwide.
Retain BUY for a target price of KRW96,000
We retain our BUY rating on CS Wind for a target price of KRW96,000, based on the 12-month forward EPS forecast of KRW2,904 and a target PER of 33.2x (2022F PER of Vestas). The company stands to benefit from steady gains in wind tower market share through M&As and extension of US tax credits for wind energy in 4Q21. However, the valuation premium vs. machinery peers could shrink if interest rates rise on economic recovery expectations following approval of the infrastructure bill in September.