Order Intake to Be Key
The author is an analyst of KB Securities. He can be reached at moonjoon.chang@kbfg.com. -- Ed.
2Q22 review: OP in line with consensus on robust revenue despite extra costs of KRW60.0bn
— Samsung Engineering posted 2Q22P consolidated revenue of KRW2.5tn (+47.0% YoY, +15.3% QoQ), OP of KRW153.5bn (+2.1% YoY, -12.0% QoQ), and NP (attributable to controlling interests) of KRW140.5bn (+50.8% YoY, +22.7% QoQ).
— Hydrocarbon incurred approximately KRW60bn in additional costs, but OP was in line with consensus, thanks to:
(1) strong top-line growth (+47.0% YoY); and
(2) solid Non-hydrocarbon margins.
— Strong top-line growth (+47.0% YoY): (1) Hydrocarbon revenue was bolstered by the Dos Bocas (Mexico), Sarawak (Malaysia), Unaizah (Saudi Arabia), and APOC (Saudi Arabia) projects, with the four accounting for 70% of Hydrocarbon revenue. (2) Non-hydrocarbon revenue was reinforced by high order receipts (KRW2.9tn in 1H22 vs. KRW4.1tn in 2020, KRW4.1tn in 2021).
— Weaker Hydrocarbon margins (12.2% GPM in 1Q22 → 6.8% GPM in 2Q22):
(1) Higher feedstock prices (due to Russia-Ukraine war) resulted in loss provisioning of KRW41.4bn for the Zafurah (Saudi Arabia; early stages) project.
(2) Other projects incurred KRW20.0bn in costs for construction delays.
— KRW depreciation generated KRW30.0bn in FX-related gains.
1H22 order intake at KRW4.28tn (vs. KRW8.0tn annual target)
— 1H22 order intake at KRW4.28tn: Hydrocarbon KRW1.34tn, Non-hydrocarbon KRW2.94tn
— Non-hydrocarbon enjoyed boost in order intake thanks to affiliates’ investments
— Key project orders include Baltic ethane cracker (Russia); Shell OGP (Malaysia) not booked
— Overseas order pipeline: Bid results for USD4.0bn in projects pending; Bids for USD6.5bn in projects to be submitted in August-September
(1) Shell OGP (KRW0.7tn; Malaysia): Order won in July
(2) PDH PP (KRW1.2tn; Vietnam): Bid result due in 3Q22
(3) PDH/PP (KRW2.0tn; Algeria): Bid result due in 3Q22
(4) Ras Laffan petrochemical (KRW2.0tn; Qatar): Bid result due in 4Q22
(5) Amiral Complex (Saudi Arabia): Bid result due in 4Q22-2023
Rise in Hydrocarbon COGS disappointing; Uptrend in order backlog to be key for share price
— While 2Q22 results were for the most part in line with market expectations, the increase in the Hydrocarbon COGS ratio, which has historically been solid, is disappointing.
— We expect the Hydrocarbon COGS ratio to normalize in 3Q22, however, given conviction for higher margins in projects remaining in the backlog.
— We believe the impact of 2Q22 results on share price, despite the one-off expenses, will not be significant.