Time to Resume Buying
The author is an analyst of KB Securities. He can be reached at moonjoon.chang@kbfg.com. -- Ed.
1Q22 review: Despite strong revenue, earnings sluggish due to weaker Housing margin
— GS E&C announced 1Q22P revenue of KRW2.4tn (+18.1% YoY, -9.4% QoQ), OP of KRW153.5bn (-13.2% YoY, -20.1% QoQ) and NP (attributable to controlling interests) of KRW142. 0bn (-7.9% YoY, +114.9% QoQ). Revenue surpassed the market consensus and OP fell short.
— Revenue was largely driven by Building/Housing revenue growth of 40.7% YoY. Housing revenue rose in line with an increase in projects under construction (Housing-only revenue of KRW1.34tn in 1Q22; +28.7% YoY) and S&I Corporation was consolidated (KRW120.0bn in March revenue).
— Despite solid revenue, sluggish Housing/Building margins (14.6% GPM in 1Q22) weighed on OP. A substantial portion of the 10,000 units in presales completed in 2H21 (or presales delayed since project initiations in 2021) are without finalized COGS ratio estimates because of surging material prices. In other words, the projects are progressing with profits assumed to be zero at present.
— Housing/Building GPM should improve starting 2Q22 on confirmation of COGS ratios. We expect annual Housing GPM at 20%. GS E&C stated that it will be able to absorb most of the surge in material prices, limiting the expected YoY drop in Housing GPM to just 3%.
1Q22 cumulative housing supply of 2,317 units (8.3% of 2022 target)
— GS E&C recorded 1Q22 cumulative housing supply of 2,317 units (8.3% of annual target).
— 2022 presales are estimated at 27,768 units (1Q22E/2Q22E/3Q22E/4Q22E at 2,317 units/7,595 units/14,000 units/3,856 units). Presale volume should expand in earnest from 2Q22, starting with projects with higher profitability.
1Q22 cumulative new orders of KRW3.4tn (domestic/overseas at KRW2.94tn/KRW0.46tn)
— 1Q22 domestic orders reached KRW2.9tn (32% of 2022 domestic order target of KRW9.2tn).
— Housing orders alone reached KRW2.7tn in 1Q22, largely driven by redevelopment and reconstruction projects, which lifted overall domestics orders.
Cost uncertainty fading; time to resume accumulation, refocus attention on revenue growth
— The current downtrend in construction stocks is partly attributable to the unpredictability of housing declines and earnings results (rising material prices).
— GS E&C has improved margin visibility, announcing that, despite higher material costs, it will achieve annual Housing GPM of 20% via annual price negotiations and economies of scale. A such, we believe investors should refocus their attention on revenue growth.
— Amid accelerating Housing revenue growth, S&I Corporation earnings will be fully reflected from 2Q22 (equivalent to annual revenue of ~KRW1.5tn).
— As uncertainty in regard to material prices seems to be fading, the upcoming government’s real estate policy (to be announced after 1Q22 earnings season) should to be a major stock catalyst.
— We believe now is an opportunistic time to resume accumulating large construction stocks, as (1) large builders are forecast to sharply expand their shares of the housing market (2) the upcoming government’s policy aims to revitalize redevelopment and reconstruction projects.