3 Growth Drivers to Boost Mid/long-term Earnings
The author is an analyst of NH Investment & Securities. He can be reached at minwoo.ju@nhqv.com. -- Ed.
Owing to sluggish cathode/anode materials sales, amid production disruptions at finished car makers, POSCO Chemical appears to lack short-term earnings momentum. The impact of production disruptions should fade completely in 2022, and three growth drivers are expected to boost mid/long-term earnings estimates.
Waiting for momentum
We maintain a Buy rating and TP of W270,000 on POSCO Chemical. We lower our OP estimates by 5~6%, as we cut our forecasts for the main steel business for 2022~2023, owing to a hike in raw material prices; however, we maintain our TP thanks to an increase in our four-year target P/E (37x → 39x). 1) Overseas plant expansion; 2) the securing of new clients; and 3) improved cost competitiveness through entry into upstream markets should provide share price momentum.
Temporary slump due to production disruptions for finished cars
The firm reported 3Q21 sales of W504.9bn (+29% y-y, +5% q-q), in line with market expectations, but OP came in at W31.4bn (+62% y-y, -11% q-q), missing consensus by 16%. Excluding the impact of W5bn in one-off expenses related to a spike in labor costs, OP would have met consensus.
The main business achieved strong results for refractory materials and quicklime thanks to POSCO’s increased crude steel production, but sales of cathode/anode materials slid q-q owing to production disruptions at finished car makers amid a shortage of semiconductors. In particular, limited sales of anode materials, which are installed in various car models, had a significant impact on the firm’s earnings.
We forecast 4Q21 OP of W30.7bn (+47% y-y, -2% q-q), which is 20% below consensus of W38.8bn given our belief that the sluggish sales will continue in 4Q21 due to continued disruptions at finished car makers. Similarly, anode materials sales are likely to remain weaker than cathode materials sales. Accordingly, we lower our 2021 anode material sales forecast by 8%, but we maintain our previous estimate for 2022 anode material sales given likely production recovery and deferred demand.
Despite an absence of short-term earnings momentum, overseas plant expansion, the securing of new clients, and improved cost competitiveness through entry into upstream markets should bolster POSCO Chemical’s mid/long-term earnings estimates and provide momentum for its share price.