2Q22 Earnings Surprise

The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.

 

Hyundai Glovis reported strong 2Q22 earnings thanks to the favorable forex rate and increased cargo volume. The company should enjoy mid/long-term top-line growth on a jump in finished car production. However, we lower our TP by 12%, as we cut our target valuation, noting the ceiling in non-affiliate sales (with high margins) due to the firm’s limited fleet expansion.

Lower target P/B multiple to reflect mid/long-term decline in shipping division margins

We maintain a Buy rating on Hyundai Glovis but lower our TP by 12% to W245,000. We boost 2022E and 2023F EPS by 8.8% and 4.9%, respectively, in light of the favorable forex rate and increased freight volume. However, considering the limited expansion of the firm’s finished car shipping fleet (which has resulted in a slowdown in sales volume growth for high-margin non-affiliate sales) and rise in the risk-free interest rate, our target P/B is cut from 1.5x to 1.3x.

Fleet expansion is currently difficult due to a sharp uptick in charter rates for finished car vessels and a hike in used ship prices. Short-term charter vessels have been returned, reducing the firm’s fleet from 96 vessels in 3Q21 to 86 vessels in 2Q22. Meanwhile, increased cargo volume at affiliates is limiting the expansion of high-margin non-affiliate & non-automotive sales. We forecast a mid/long-term decrease in margins at the transportation division.

As finished car production and overseas parts logistics are ramping up, a higher level of sustainable profit is being achieved, with both the distribution and logistics divisions reporting top-line growth. Forecasting average ROE of 16% over the next three years, we see ample valuation merit with the stock trading at a P/B of 1.0x.

2Q22 earnings surprise, led by favorable forex rate and increase in cargo volume

Glovis logged a 2Q22 earnings surprise, with sales of W6.86tn (+25.5% y-y) and OP of W448.5bn (+62.0% y-y; OPM of 6.5%).

The logistics division reported sales of W2.37tn (+31% y-y) and OP of W162.5bn (+15% y-y). Favorable forex rate trends and increased cargo volume in the US led the strong results. The shipping division booked sales of W1.11tn (+46% y-y) and OP of W93.2bn (+157% y-y). Profitability declined due to greater fuel costs (expected to receive fuel surcharges in 3Q22) and decreased non-affiliate sales due to the lockdown in China. The distribution division posted sales of W3.38tn (+17% y-y) and OP of W192.8bn (+94% y-y), driven by higher production at affiliates, increased cargo volume at a new plant in Indonesia, and favorable forex rates.
 

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