Rising Cost Burden to Be Offset by Drillship Lease Profit

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

 

We revise up our new order estimate for SHI by 12% and raise our TP accordingly. In the near term, the firm is likely to struggle due to rising raw material costs. However, efforts for fundamental improvement (eg, a new drillship lease contract and order portfolio shift) are well underway.

Raise order forecast (+12%) and target P/B (1.2x → 1.3x)

We revise up our 2021 new order estimate for SHI from US$9.2bn to US$10.3bn. Accordingly, we hike our target P/B from 1.2x to 1.3x and raise our TP from W6,100 to W6,700.

Conditions surrounding the firm’s new orders are in line with expectations. New orders are mostly being placed for LNGCs and containerships—a trend that we expect to continue through yearend.

Rising cost burden to be offset by drillship lease profit

Raw material cost increase is anticipated to be reflected in 2Q21 earnings. Depending on the firm’s negotiations with steel companies, plate prices will likely climb by 30~50%, which could lead to an 8~13% uptick in total costs.

Helped by SHI’s signing of a deal to lease one of its undelivered drillships, a portion of cost increase is to be offset by lease profits. Given that drillships are leased at around W400mn/day on average in the global market, we believe that SHI will secure annual lease profits of over W100bn even if its signed lease price is below the market rate.

Fundamental improvement underway

Although SHI is projected to benefit in the long run from both enhanced environmental regulations and the vessel replacement cycle, we believe that it will take at least two years or more for the firm to make a meaningful change to its order backlog portfolio and normalize profitability. In our view, SHI first needs to improve its years-long loss-making business structure before sufficient time passes for rising cost burden to result in vessel price expansion. In addition, improving its financial structure via rights offering is another key task for SHI to complete in 2H21.
 

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