Positive on Shift in Growth Strategies
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 KRW91,000; rapid rebound likely once earnings uncertainty lifted
We maintain BUY on DL E&C and lower our TP by 3.2% to KRW91,000 (0.8x 12m fwd P/B), which reflects the recently offered 100% equity bonus. The stock is weighed down by a high base from last year and rising commodity prices. Nonetheless, we believe:
(1) the redevelopment/reconstruction businesses, where large builders have an edge, are building momentum given the next government’s real estate policies;
(2) the company’s intent to boost its plant and new businesses (e.g., carbon capture, utilization and storage) is stronger than ever; and
(3) DL E&C’s net cash of KRW1.2tn (as of end-2021) should shield the company from inflationary-pressure shocks. As such, the stock, which is trading at 0.5x 12m fwd P/B, 4.2x P/E, looks grossly undervalued. We expect a rapid rebound once a degree of uncertainty over industry earnings is lifted.
Positive on shift in growth strategies, especially for plant/new business
DL E&C’s shift in growth strategies is positive, especially for the plant business. A lack of growth strategies was cited as the reason behind the stock’s persistent undervaluation since before the spin-off. With its standout capabilities in FEED and design, the company’s current push to enter a new market/construction type could boost profit margins. Operations in Russia, which were once anticipated as a new core market, seem unlikely to fare well for the time being, but the company is firing on all cylinders to gain a head start in CCUS.
1Q22 housing supply lackluster, but no need to lower expectations given new upcoming government
DL E&C presented 2022 housing supply guidance of ~20,000 homes (based on housing starts; standalone-basis), but only 1,000 homes were supplied in 1Q22. Given the prospect of full-fledged construction starts/presales under the new Korean government (to take office in May) and with local elections to be held in July, however, there is no need for lowering expectations.
1Q22 forecast: Sluggish housing revenue, higher COGS
We forecast 1Q22 consolidated revenue/OP/NP attributable to controlling interests at KRW1.7tn (+1.4% YoY, -21.8% QoQ)/KRW178.5bn (-10.7% YoY, -33.8% QoQ)/KRW121.5bn (-23.9% YoY, +4.5% QoQ), which meets the lowered market consensus. Earnings should decline YoY/QoQ on sluggish housing revenue and higher COGS (rising commodity prices).