Earnings to Normalize from 2023
The author is an analyst of KB Securities. He can be reached at moonjoon.chang@kbfg.com. -- Ed.
Maintain BUY; Lower TP to KRW46,500
We maintain BUY but cut our target price by 17.7% to KRW46,500 (0.75x 12m fwd BVPS of KRW62,095) for GS E&C to accommodate a rise in COE (9.4%→10.4%) and a decline in ROE (9.0%→8.6%) resulting from earnings estimate revisions.
2Q22 outlook sluggish despite robust revenue on potential increase in expenses overseas
For 2Q22, we estimate revenue at KRW2.6tn (+18.6% YoY, +11.4% QoQ) and OP at KRW155.0bn (+24.1% YoY, +1.0% QoQ).
(1) The uptrend in revenue since 1Q22 should continue into 2Q22 thanks to the inclusion of S&I in consolidated financial statements as well as increases in on-site housing construction revenue.
(2) Building/Housing GPM should edge up QoQ (14.6% in 1Q22 → 16.6% in 2Q22E), given on-site housing construction at fixed cost ratios and realization of changes in commodity prices.
(3) However, in the event accounts receivable for a project in Iraq nearing completion are not smoothly recouped due to delays in negotiations with the ordering party, provisions may be booked, in which case OP should come in far lower than consensus.
Earnings to normalize from 2023 on better construction pricing
Downward revisions to our earnings estimates for 2022 are inevitable, given increases in COGS ratio for housing construction as well as unexpected losses from overseas projects. A pessimistic outlook on mid/long-term profitability is unwarranted, however, as: (1) unstable supply-demand dynamics for building materials and the issue of rising prices appear to be abating; and (2) the company has been taking steps to raise construction prices, mainly for redevelopment/reconstruction projects. While we expect GS E&C to post revenue of just KRW10.5tn (+16.0% YoY) and OP of KRW701.4bn (+8.5% YoY) for 2022E, the company should safely achieve revenue of KRW11.3tn (+8.0% YoY) and OP of KRW918.3bn (+30.9% YoY) for 2023E, even under a conservative scenario.
Focus should be on positives; Shares trading at P/B multiple of less than 0.5x
Given the greater exposure to Building/Housing at GS E&C, share-price performance for the company may lag behind those of its rivals until uncertainties surrounding the housing construction business (i.e., commodity prices, government policies) recede. However, we expect earnings to normalize starting in 2023, given better pricing for builders amid government measures for activating redevelopment/reconstruction projects. With shares in GS E&C currently trading at a 12m fwd P/B multiple of less than 0.5x, we believe focus should be placed on such positive changes.