Competitive Valuations

The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.  

 

In addition to attractive valuations, from 2022, DL E&C’s rising portion of self-development business at the housing division and increasing new orders from CCUS projects should stand out. DL E&C shares are trading at a 2021E and 2022F P/E of 5x and 4x, respectively.

Foundation for earnings momentum being built via several routes

We maintain a Buy rating and TP of W230,000 on DL E&C, a second preferred play in the construction sector. We favorably view: 1) expanding orders from self-development projects, which are more profitable than general urban redevelopment or outsourcing projects; 2) completed and in-progress orders for eco-friendly CCUS projects; and 3) its attractive (vs large construction firms) 2021E P/E of 5x, even when taking into account the valuation dilution effects of subsidiary DL Construction.

Highlight significance of: 1) self-development business; and 2) eco-friendly business

DL E&C is expanding in terms of self-development projects. Out of the firm’s annual target for self-development projects of W1.2tn, W1.0tn was likely reached in 3Q21. For reference, the portion of self-development projects with public sector partners and private sector partners stands at 70% and 30%, respectively. Of note, self-development projects typically see superior profit margins, as the company can secure profits from both development and construction. In addition, DL E&C has been planning a carbon dioxide capture, storage, and utilization (CCUS) project with Daesan Power and Hyundai Oilbank from Aug 2021. Already possessing experience with CCS EPC from 2013, DL E&C is now expected to develop into a major CCUS EPC player boasting a track record of 1mn tons (in annual capacity) of CCUS EPC.

3Q21 preview: To report smooth sailing

DL E&C is forecast to post consolidated 3Q21 sales of W1.9tn (+3% q-q) and OP of W204.9bn (-11% q-q), in line with consensus. On a non-consolidated basis, apartment pre-sale volume likely reached 11,000 units in 3Q21. We expect the annual pre-sale target of 21,000 units to be achieved without difficulty. In 3Q21, new orders received on a non-consolidated basis likely amounted to W4.2tn, a figure which should place the annual target within reach.

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