Exports of Profitable Defense Products Remain Strong
The authors are analysts of Shinhan Investment Corp. They can be reached at krpark@shinhan.com and mw.choi@shinhan.com, respectively. -- Ed.
2Q22 standalone OP of KRW76.4bn beats market expectations
Poongsan posted sales of KRW879.7bn (+31.3% YoY) and operating profit of KRW76.4bn (-5.3% YoY) on a standalone basis for 2Q22, beating consensus estimates (sales of KRW844bn, operating profit of KRW63.6bn). Sales of defense products stood at KRW212.1bn (+6.8% YoY), falling short of our KRW284.2bn estimate. Copper and copper alloy products delivered strong performance with sales of KRW664.5bn. Shipments came in at 49,600 tons near year-ago levels. Thanks to higher copper prices recorded in March-May (average USD9,940/ton, +4.9% YoY, +1.9% QoQ) vs. December-February (USD9,753/ton), ASP rose above our previous estimate (KRW12.3mn/ton) to KRW13.4mn/ton. For consolidated earnings, which have yet to be announced, we now expect Poongsan to record sales of KRW1.19tr (+29.0% YoY) and operating profit of KRW88.7bn (-16.7% YoY) for 2Q, exceeding market expectations (sales of KRW1.13tr, operating profit of KRW80.4bn).
2H22 OP forecast at KRW79.7bn (-45.1% YoY)
Poongsan announced the standalone earnings guidance for 2H and full-year 2022 at its recent IR event. For 2H, the company forecasts standalone sales at KRW1.67tr, sales of copper and copper alloy products at KRW1.19tr, sales volume at 101,000 tons, sales of defense products at KRW475.3bn (domestic sales KRW256.3bn, exports KRW219.1bn), and pre-tax profit at KRW72.4bn. We find the guidance somewhat conservative since it assumes copper prices will average USD7,800/ton in 2H. Copper prices are likely to rebound in 4Q with China’s fiscal stimulus in full swing in the second half of the year. We estimate an average USD8,224/ton for 2H (USD8,065/ton in 3Q, USD8,383/ton in 4Q). Accordingly, we expect Poongsan to generate standalone sales of KRW1.73tr with sales of copper and copper alloy products reaching KRW1.25tr. Consolidated operating profit is projected at KRW79.7bn (-45.1% YoY) for 2H. The company should see a sharp drop in consolidated operating profit to KRW25.8bn in 3Q due to inventory valuation loss and metal loss incurred by plunging copper prices.
Retain BUY and lower target price to KRW33,000
We revise down our target price for Poongsan from KRW37,000 to KRW33,000. The target PBR was downgraded due to heightened volatility in the stock market triggered by macro uncertainties. Although earnings momentum has been hampered by a drop in copper prices, we maintain our BUY rating on Poongsan in view of: 1) continued strong exports of profitable defense products; 2) improvements in processing margin on increased sales of high value-added and future growth products; and 3) PBR falling to levels seen in the early phase of the pandemic.