Boasting Balanced Domestic/Overseas Momentum
The author is an analyst of KB Securities. He can be reached at moonjoon.chang@kbfg.com. -- Ed.
Maintain BUY; cut target price 12% to KRW55,000
We maintain BUY on Hyundai E&C but cut our TP by 12.0% to KRW55,000 (12m BVPS x 0.8x P/B) to reflect an increase in COE (8.5%→9.1%) and decrease in ROE (7.9%→7.8%).
2Q22 preview: Despite solid top-line performance, earnings to miss market consensus on growing COGS burden
We forecast 2Q22 consolidated revenue/OP at KRW5.0tn (+13.5% YoY, +20.0% QoQ)/ KRW177.6bn (+25.9 YoY, +3.6% QoQ). Our OP estimate is below the consensus, as we expect domestic COGS to grow increasingly burdensome (rising raw material prices) and near-completed overseas projects to see costs mount, more than offsetting strong domestic/overseas revenue growth.
2022/2023 outlook: Positive factors point to earnings improvement
A downward revision to 2022E earnings seems inevitable given the COGS burden, but we believe concerns over mid-/long-term profitability are excessive, as it looks as if:
(1) construction material prices and supply-demand imbalances are stabilizing;
(2) builders are lifting project prices, esp. redevelopment/reconstruction projects;
(3) rising oil prices should allow for negotiations on overseas projects’ costs; and
(4) early-stage overseas projects are taking a greater proportion of projects.
All these factors suggest earnings will bottom out. Accordingly, we forecast 2022 revenue/OP at KRW19.4tn (+7.5% YoY)/KRW759.7bn (+0.8% YoY) and 2023 revenue/OP at KRW21.3tn (+9.7% YoY)/KRW984.3bn (+29.6% YoY).
Boasting balanced domestic/overseas momentum
Hyundai E&C boasts balanced domestic/overseas momentum. The standout housing supply seen in 2021 has continued; 15k apt. units (standalone) were supplied in 1H22 (~50% of annual target). Firming hopes for overseas nuclear plant/infrastructure orders should garner favorable attention given the company’s track record and project pipeline.