Expectations Growing for Nuclear Plant Equipment Exports
The author is an analyst of NH Investment & Securities. He can be reached at jinmyung.choi@nhqv.com. -- Ed.
DHIC’s earnings should normalize this year thanks to governance reform and business restructuring. Expectations are growing towards the export of nuclear plant equipment and materials for overseas projects, as well as a turnaround at the power generation business. DHIC is transitioning towards a future-oriented growth company through the listing of NuScale Power and rising market interest in SMRs.
Valuation re-rating: P/S approach applied
Having traded at a P/B of 0.7x on average, Doosan Heavy Industries & Construction (DHIC) now deserves a P/S approach, in our view, given that it has transformed from a low-growth company with financial risks in a traditional industry to a high-growth firm with normalized financials in a high-tech sector over a period of two years of market changes and restructuring.
Considering its business portfolio, DHIC appears undervalued to its peer group. The company is shifting focus from coal and traditional machinery (average P/S of 0.7x) to natural gas and renewables (1.2x) and nuclear and SMRs (3.6x).
Reduced financial cost burden; net debt cut to W4tn-level
With the easing of financial burden, DHIC should enter a margin growth phase, as narrowing debt and an improved credit rating should create a sustained virtuous cycle (eg, decline in funding rate). Of note, net debt reached as high as W9.3tn in 2015, but it narrowed to W4.1tn at end-2021.
We expect that DHIC will continue to enjoy a prolonged profit growth phase moving ahead on the back of increased orders and resulting sales growth. The improvement in credit rating has allowed the firm to take part in the bidding for overseas projects. Outstanding performances in offshore wind power, natural gas, hydrogen, and SMR businesses are also anticipated.
Listing of NuScale Powerto benefit DHIC (albeit indirectly)
NuScale Power, in which DHIC made an equity investment in 2019, is set to be listed in Mar 2022. NuScale is planning to use IPO funds for large-scale SMR projects, and DHIC is known to hold priority rights for the supply of parts and equipment for such endeavors.