Despite Copper Price Downtrend, Profitability to Remain Intact
The author is an analyst of NH Investment & Securities. He can be reached at minwoo.ju@nhqv.com. -- Ed.
Although copper prices are dropping, the impact on Iljin Materials’ profitability should prove minimal.
Expect additional investment plans to materialize after decision on acquirer
Although adhering to a Buy rating, we lower our TP on Iljin Materials by 21% to W118,000. We have adjusted our 2022~2024 sales forecasts by around 10~20% compared to our previous estimates in light of a likely elecfoil product ASP cut due to copper price downtrend. That said, the lowering of our TP does not stem from earnings forecast adjustments, but instead reflects a decrease in our target multiple (22x → 18x) made in reflection of a higher discount rate. A decision concerning who is to acquire the controlling shareholder’s stake (53%) in the firm is expected to be made in late-August~early-September. After the new controlling shareholder is determined, we expect additional investment plans (centering upon North America and Spain) to materialize.
Despite copper price downtrend, profitability to remain intact
Iljin Materials posted consolidated 2Q22 sales of W188.4bn (+10% y-y, -6% q-q) and OP of W25.2bn (+18% y-y, +17% q-q), with both figures missing consensus on: 1) lower-than-expected elecfoil sales due to Chinese city lockdowns; and 2) weakened earnings at construction subsidiaries amid a construction industry slowdown.
For 3Q22, we foresee sales of W224.2bn (+12% y-y, +19% q-q) and OP of W29.9bn (+27% y-y, +18% q-q). Despite continued sluggish earnings at its construction subsidiaries, Iljin Materials’ overall earnings growth should reinvigorate upon the slated start of operations from mid-September at its #3 and #4 plants in Malaysia. Copper prices have been trending downwards since June, but considering that full-fledged reflection of ASP adjustments is to take place in September, we expect the firm’s elecfoil ASP to remain solid through 3Q22 before sliding roughly 9% q-q in 4Q22. Upon the predicted cut in elecfoil ASP, the company’s elecfoil sales (PxQ) are to slip below our previous projections, but the accompanying impact on elecfoil OP should prove insignificant, given strengthened margins (thanks to lessened raw material cost burden).
After a test run in 2H24, Iljin Materials’ Spanish plant (25,000 tons/year) is scheduled to start mass production in early 2025. And, with site selection for a US plant to wrap up within 2022, the firm is aiming to have US mass production underway in 2026. Having secured 90,000 tons worth of capacity in Malaysia, the company’s future capacity expansion plans will likely focus upon Spain and North America. Additional expansion plans should materialize after the new controlling shareholder decision is made in late-August~early-September.