Buy-and-hold Strategy Seems More Attractive
The author is an analyst of KB Securities. He can be reached at moonjoon.chang@kbfg.com. -- Ed.
Maintain BUY; lower target price to KRW28,000
We maintain BUY on Samsung Engineering but lower our TP 9.7% to KRW28,000 (2.0x 12m fwd P/B) to reflect a COE increase (7.9%→9.0%). Given current macro conditions, elevated oil prices since earlier this year are unlikely to immediately improve order placement markets. For Samsung Engineering, waiting for a turnaround would be warranted, as the company should post solid 2022-23 results thanks to full-fledged revenue generation from FEED to EPC linkage projects (e.g., Mexico’s Dos Bocas and Malaysia’s Sarawak projects). Rather than short-term trading, a buy-and-hold strategy seems more attractive based on expectations for mid-/long-term order improvements.
Expect solid 2Q22 earnings
We forecast 2Q22 consolidated revenue/OP at KRW2.17tn (+27.9% YoY, +0.3% QoQ)/KRW156.2bn (+3.9% YoY, -10.4% QoQ). The solid earnings should be driven by (1) better hydrocarbon revenue led by the high-margin Dos Bocas refinery and (2) growth in non-hydrocarbon revenue, mainly on deals with affiliates.
Expect full-fledged industry turnaround to begin next year or thereafter
Despite higher oil prices, we do not anticipate a full-fledged industry turnaround until next year or thereafter. Given unstable commodity prices, we believe bids and contracts for major projects, which typically take years to complete, will not go smoothly. We see Samsung Engineering winning KRW7.5-8.0tn in orders this year (KRW8.0tn guidance) given the KRW1.4tn Russian Baltic Ethane Cracker Center (awarded earlier this year).
Standout earnings power; stock performance to depend on orders, market conditions
We believe the stock’s downside will improve compared to historical levels given reinforced earnings power. However, the order backlog needs to steadily improve on sustained new orders or clear signs of a market turnaround are needed for a stock rally.