Profits from Overseas and Other Operations Jump
The authors are analysts of Shinhan Investment Corp. They can be reached at krpark@shinhan.com and mw.choi@shinhan.com, respectively. -- Ed.
2Q22 OP likely beat consensus at KRW190.8bn (+252% YoY)
Korea Gas is expected to have recorded sales of KRW7.95tr (+64.1% YoY) and operating profit of KRW190.8bn (+251.6% YoY) in 2Q22, topping market expectations for sales of KRW8.28tr and operating profit of KRW163.5bn. We believe the steep growth in sales was driven by increases in gas selling prices (+56.9% YoY) and sales volume (+4.7% YoY for city gas, +6.8% YoY for power generation). Operating profit from the regulated gas business at home likely soared by 265% YoY to KRW77.2bn on the increase in guaranteed return. Profits from overseas and other operations after consolidation adjustments should have jumped by more than 242% YoY on ASP hikes reflecting higher commodity prices and resumption of LNG exports from the Prelude floating liquefied natural gas (FLNG) facility in Australia (one cargo in 2Q22).
Key variables: Oil price decline & Prelude FLNG/Freeport LNG shutdowns
The recent oil price decline has been weighing heavily on share performance, with earnings from the regulated gas business remaining stable based on the comprehensive cost system that guarantees a fair return, but profit from most overseas projects linked to international oil price movements. Given that domestic operations account for over 80% of earnings as of 2021 and that changes in oil prices are reflected in ASP with a time lag, company earnings or fundamentals are unlikely to take a hit unless international oil prices fall at a steeper pace going forward.
Meanwhile, we see no cause for concern over the recent shutdown of Prelude FLNG with the labor strike at the facility unlikely to continue for long. Even if a drawn-out labor dispute leads to sluggish Prelude FLNG earnings in 3Q22, subsequent disruption in global supply should add upward pressure to LNG prices going forward. In all, we expect any impact from the Prelude FLNG shutdown to be offset by increases in gas ASP and guaranteed return. In addition, Freeport LNG's fire-damaged terminal in the US is unlikely to resume normal operations up to the year's end, causing LNG prices to continue further upward as a result.
Retain BUY for a revised-down target price of KRW59,000
Our rating on Korea Gas remains unchanged at BUY. Despite limited changes made to earnings forecasts, we revise down our target price to KRW59,000 from KRW63,000 with stock market volatility on the rise due to macro issues.