Overseas Order Wins to Materialize from 2Q22
The author is an analyst of KB Securities. He can be reached at moonjoon.chang@kbfg.com. -- Ed.
Maintain BUY but lower target price to KRW62,500
We maintain BUY but lower our TP by 5.3% to KRW62,500 for Hyundai E&C to reflect changes to risk-free rate (0.75%→1.29%) and 12m fwd BVPS (KRW65,205→KRW69,306). The rally that appeared around the time of the presidential election has lost steam on concerns over earnings taking a hit from rising commodity prices. However, this provides an attractive entry point, given: (1) increased visibility over housing supply under the new government (inauguration in May); and (2) Hyundai E&C being a rare investment play on improving conditions in markets both at home and abroad over the mid/long-term.
1Q22E earnings likely to miss market consensus
We expect 1Q22E consolidated revenue and OP to come in below market consensus, at KRW4.42tn (+6.5% YoY, -14.7% QoQ) and KRW184.2bn (-8.3 YoY, -3.7% QoQ), respectively. Contrary to market concerns, earnings are likely to have had a marginal impact from surging commodity prices. We see a need for lowered expectations, however, given: (1) a decline in progress rates of domestic projects due to safety inspections; (2) slower rebound in revenue from overseas projects amid the spread of the Omicron variant; and (3) delays in earnings recovery at consolidated subsidiaries, which had posted sluggish results in 4Q21.
7,052 homes supplied in 1Q22
Hyundai E&C continues to rank highest among large construction players in terms of housing supply (this year in addition to last). According to company guidance, Hyundai E&C expects to supply 30,405 units (standalone basis), of which 7,052 (or 23.2%) have been supplied as of 1Q22. We foresee solid performance throughout 2022, considering moves by the new government for increasing housing supply via lifting of redevelopment/reconstruction regulations.
Overseas order wins to materialize from 2Q22
While we expect the company to have won no large-scale overseas orders in 1Q22, we anticipate new order wins (i.e., infrastructure projects) to materialize from 2Q22. The results of bids made for such projects as the Philippines North-South Commuter Railway (KRW2.0tn), Uzbekistan power plant (KRW0.7tn), and Saudi Arabia Neom City tunnel (KRW2tn) are likely to be announced in 2Q22-3Q22, upon which greater visibility will be gained as to whether the company would be able to meet its guidance (overseas new orders of KRW5.6tn; standalone basis).