Bolstered Valuation Premium Should Buoy Stock Price
The author is an analyst of KB Securities. He can be reached at newday@kbfg.com. -- Ed.
Initiate coverage with BUY rating, KRW125,000 target price
We initiate coverage on HHI with a BUY rating and 12m TP of KRW125,000 (30.8% upside potential). Our TP is based on 12m fwd BVPS, 1.89x target P/B (1.31% risk-free rate; 7.16% market risk premium; 0.99 beta; 2.30% terminal growth rate, 13.78% sustainable return on equity); we use 1y monetary stabilization bond yield as the risk-free rate and avg. 30y KTB yield (last three months) as terminal growth rate.
World’s No. 1 shipbuilder
HHI is acclaimed as the world’s largest shipbuilder. Since its establishment in 1972, the company has delivered more than 2,300 vessels to 324 shipowners from 52 countries. It builds merchant vessels, warships, offshore/onshore plants and vessel-purpose engines. It boasts the world’s No. 1 shipbuilding capacity and order backlog (in terms of merchant vessels), commands the largest market share in vessel-purpose low-/mid-speed engines and ranks the highest for new order intake (2021).
Expecting turn to black from low in 2021
We believe HHI suffered a KRW634.9bn loss in 2021, weighed down by past orders (placed at low prices), surging commodity prices (e.g., steel plates) and a lost wage lawsuit. For 2022/2023, however, we expect a turn to black, with OP reaching KRW132.7bn/KRW342.4bn on the back of rising shipbuilding prices and the reversal of provisions for construction losses (linked to steel plates). Our 2022E/2023E OP are below the market consensus by 22.9%/32.5%.
Bolstered valuation premium should buoy stock price
In addition to the earnings turnaround, HHI’s bolstered valuation premium relative to rivals should buoy the stock price. The premium should be supported by the company’s:
(1) top brand awareness (No. 1 industry brand);
(2) excellent cost competitiveness (via internal procurement of key vessel parts);
(3) leading position in eco-friendly vessels (coupled with standout R&D capabilities);
(4) financial stability; and
(5) growing national defense business (stable profit margins).