Despite Sluggish Results, Earnings Story Not Negative
The author is an analyst of KB Securities. He can be reached at moonjoon.chang@kbfg.com. -- Ed.
1Q22 review: Sluggish results on weak earnings at subsidiary DL Construction
— DL E&C results fell far short of market expectations, with 1Q22P consolidated revenue of KRW1.51tn (-10.9% YoY, -31.2% QoQ), OP of KRW125.7bn (-37.1% YoY, -53.4% QoQ) and NP (attributable to controlling interests) of KRW101.1bn (-36.7% YoY, -13.0% QoQ). Weak performance at DL Construction and higher Housing COGS at DL E&C were major factors.
— Subsidiary DL Construction was hit by a drop in urban redevelopment projects and a surge in COGS from distribution center construction; revenue plunged by over 20% on tepid construction starts last year (KRW63.0bn OP in 1Q21→ KRW3.9bn OP in 1Q22).
— DL E&C saw Housing COGS rise (78.8% 1Q21→82.0% in 1Q22) in line with the jump in commodity prices. The annual Housing COGS target is 81.1% (cost-cutting efforts to be fully reflected starting 2H22).
1Q22 housing starts: DL E&C at 1,087 units, DL Construction at 1,861 units
— DL E&C 1Q22 housing starts: 1,087 units (annual target: 20,300 units; 4,800 units in 2Q22; 7,600 units in 3Q22; 6,093 units in 4Q22)
— DL Construction 1Q22 housing starts: 1,861 units (annual target: 12,600 units; 5,800 units in 2Q22; 4,939 units in 3Q22-4Q22). Even based on conservative estimates, the company is optimistic about reaching 10,000 units.
1Q22 cumulative new orders at KRW1.1tn
— 1Q22 cumulative new orders (consolidated): KRW1.1tn (annual target: KRW13.6tn; 8% achieved)
— 1Q22 cumulative new orders at DL E&C: KRW0.97tn (annual target: KRW10.4tn; 9% achieved)
— Targets should be met given domestic housing orders typically improve heading into 2H.
— The highly likely order intake of the Russian project (~KRW1.8tn) should be delayed. DL E&C stated that it should be able to offset the shortfall with FEED–EPC orders in Qatar/Saudi Arabia.
Despite sluggish results, earnings story not negative; stock needs uptrend in order backlog
— On a standalone basis (excl. DL Construction), DL E&C reported solid results on improvements in Plant and Civil Engineering margins, despite higher Housing COGS. Also, by disclosing its annual standalone Housing COGS target of 81.1%, DL E&C, like other large domestic builders, eased earnings uncertainty resulting from rising commodity prices.
— The earnings story was not entirely negative, but new orders and the order backlog are worrying.
— The order backlog slid to KRW23.4tn in 1Q22 (vs. KRW24.3tn in 4Q21, when DL&C raised consolidated order backlog with robust domestic/overseas order intake). Considering that the KRW1.6tn Russia project won last year is unlikely to generate revenue for the time being, the likelihood of the order backlog being recognized as revenue has decreased.
— Compelling valuations may provide better downside support for the stock. However, tangible improvement in investment merit requires order growth for at least two straight quarters as well as an uptrend in order backlog.