Drillship and Financial Risks Expected to Dissipate
The authors are analysts of Shinhan Investment Corp. They can be reached at eoyeon.hwang@shinhan.com and younghoon.song@shinhan.com, respectively. – Ed.
Recommend BUY for a target price of KRW7,700
We recommend a BUY rating on Samsung Heavy Industries for a target price of KRW7,700. Current risks and market conditions are similar to those of 2018-2019, the boom years for LNG carrier orders. When compared to the average of 2018-2019, the shipbuilder’s order backlog is 25.5% larger and newbuilding prices are 17.7% higher. The expected market cap after paid-in capital increase comes to KRW6.8tr, derived by applying a 50% premium to the average market cap of 2018-2019. This suggests there is a potential for a 28.1% upside at the current share price. Although the total shareholders’ equity is lower than the past, we calculated our target price based on market cap because the shipbuilder’s intrinsic operating value remains unchanged.
The shares corrected by 33.4% during the one month following the announcement of a rights issue on December 6, 2017, and then rebounded by 15.3% upon the listing of new shares on May 4, 2018. We expect a share price rebound after the upcoming rights issue in view of: 1) upturn in order placements driven by LNG carriers; and 2) resolution of overhang issue.
Order growth driven by LNG carriers and expansion into module construction for semiconductor plants
Samsung Heavy Industries boasts the largest production capacity of LNG carriers (capacity increased from 10-12 units to 15 units in 2019) and order backlog (48 units). It also has the largest share of LNG carriers (61.7%) in total order intake. Supply of LNG liquefaction plants is projected to grow just 3.6% in 2021-2024, whereas LNG demand has increased 7.6% over the past five years. Given LNG shortages, order placements for LNG carriers should rise going forward. We believe Samsung Heavy Industries will be the biggest beneficiary with orders for 15 LNG carriers expected in 4Q21-1H22 alone.
The shipbuilder also plans to participate in Samsung Electronics’ semiconductor plant construction project based on its module construction and automatic welding technologies for offshore plants. This year, it secured a pilot construction work worth KRW60bn, which is projected to generate sales of KRW325.5bn in 2022 and KRW520.7bn in 2023. The project should help reduce the company’s overall losses in 2022.
Drillship and financial risks expected to dissipate
The shipbuilder’s debt ratio is estimated to drop to 230.2% (-95.3%p QoQ) after the rights issue. We see no problem with liquidity. Net cash outflow related to vessel construction (KRW2.2tr) and corporate bonds/commercial papers due (KRW0.7tr) in 2022-2023 will be covered by proceeds from the rights issue (KRW1.3tr) and cash assets (KRW1.8tr estimated at term-end, excluding rights issue proceeds).
The shipbuilder is seeking to sell four drillships in inventory. Expectations for sale are rising as market conditions have improved with recent oil price hikes and reduction in drillship supply. It is now in talks for the sale of two drillships at the year-end.