Earnings Fundamentals Improve
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
POSCO International booked consensus-topping 2Q22 results. Despite declining steel prices, earnings fundamentals improved on: 1) strengthened results at the Myanmar gas field; 2) the reflection of earnings from Senex Energy; and 3) the strong performance of the investment domain. We also note that the firm is to play a key role in the achievement of the POSCO Group’s 2050 carbon-neutral plan.
Stable earnings structures at trading, energy, investment domains
In 2022, POSCO International should see annual OP rise 54% y-y on the back of the POSCO Group’s export channel integration efforts, strong steel market conditions, food business expansion, motor core earnings growth, palm oil sales increase, Myanmar gas field earnings improvement, and the acquisition of a 50.1% stake in Australian natural gas company Senex Energy.
The firm has established a stable profit structure, led by its trading, energy, and investment (motor core, palm oil, Senex Energy, etc) domains. Over the long term, POSCO International is also anticipated to play a core role in achieving the group’s 2050 carbon-neutral plan via the establishment of hydrogen and CCS infrastructure.
2Q22 review: Records highest quarterly OP again following 1Q22
In 2Q22, POSCO International exceeded the new highs set in 1Q22, with sales of W11,069.9bn (+30% y-y) and OP of W320.6bn (+89% y-y), topping the market projections.
OP at the Myanmar gas field (W110.9bn, +194% y-y) was spurred by maximum investment gains thanks to the normalization of cost recovery. The investment domain (W104bn, +96% y-y) booked strong earnings led by the motor core and palm oil businesses and earnings contributions from Senex Energy (W11.1bn).
Skyrocketing OP at the Narrabri mine (W26.4bn, TTP) on increased demand for soft coal also helped to boost the domain’s earnings. At the trading division (W113.6bn, +17% y-y), OP remained flat q-q, as the food materials business showed a turnaround while steel earnings slid on the weakening of the euro.
We forecast the firm’s quarterly OP to decrease in 3Q22 (W206.1bn, +39% y-y) compare to that seen in 1H22 amid weak steel prices, decreased gains from the Myanmar gas field, and low seasonality for palm oil. However, earnings fundamentals should remain robust on increased trading volume for steel, strong soft coal prices, higher gas prices at the Myanmar gas field, and earnings contributions from Senex Energy.