Earnings Turnaround Unlikely in Near Term

The author is an analyst of KB Securities. He can be reached at newday@kbfg.com. -- Ed.

 

Raise target price to KRW5,500; Maintain HOLD     

We raise our 12m TP for Samsung Heavy Industries (SHI) by 3.8% from KRW5,300 to KRW5,500 as we reflect a decrease in shareholders’ equity on a likely 4Q21 earnings shock and change to 12m fwd period, as well as changes in 1y MSB yield (risk-free rate), 30y KTB yield (terminal growth rate), and market risk premium (7.37% for 2021 → 7.16% for 2022). We maintain HOLD, however, as our new TP falls short of the previous close despite the upward adjustment. 

4Q21 preview: Earnings shock likely           

We forecast 4Q21 consolidated (K-IFRS) revenue at KRW1.85tn (+11.3% YoY) and operating loss at KRW136.8bn (loss to narrow YoY; -7.4% OPM). While our revenue estimate is in line with the market consensus, our estimate for operating income falls well below the consensus (operating loss of KRW77.9bn), which we attribute to costs incurred from idle drillships in inventory (KRW30.0bn), valuation losses from a decrease in value for drillships (KRW10.0bn), and retroactive wage increases (KRW40.0bn) adding to fixed cost burden. 

2021 order intake of USD12.2bn marks highest level since 2013

Shipbuilding won USD12.2bn in commercial ship orders in 2021, which is more than double the USD4.6bn guidance set at the beginning of the year and 71.8% higher than the adjusted target of USD7.1bn. By ship type, SHI received orders for 44 container carriers (USD5.5bn), 22 LNG carriers (USD4.4bn), and 14 tankers (USD2.3bn). However, Offshore earnings should suffer from lack of work given the failed bid for Nigeria’s Bonga SWA FPSO (USD2.0bn) and uncertainty of future bids.

Earnings turnaround unlikely in near term; 2022 earnings to remain in red 

With the expected 4Q21 loss, SHI will extend its subpar run to 17 consecutive quarters. The situation is unlikely to improve this year; Shipbuilding still has low-margin orders remaining in its backlog, and Offshore is likely to see an increase in fixed cost burden as revenue retreats. As such, we see SHI registering revenue growth of only 1.8% YoY in 2022 and operating loss of over KRW200.0bn.    

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