Hyundai E&C (000720)

Transcription

1 Earnings Review January 27, M rating BUY (Maintain) 12M TP W75,000 from W75,000 Hyundai E&C (000720) Steady earnings despite hard times Above In line Below Up/downside +28% Stock Data KOSPI (Jan 24, pt) 1,941 Stock price (Jan 24, KRW) 58,400 Market cap (USD mn) 6,019 Shares outstanding (mn) Week high/low (KRW) 72,600/54,100 6M avg. daily turnover (USD mn) 20.7 Free float / Foreign ownership (%) 65.0/24.7 Major shareholders (%) HyunDai Motor Co and 6 others 34.9 National Pension Service (NPS) 11.8 Valuation 2012A 2013F 2014F PE (x) PB (x) ROE (%) EV/EBITDA (x) EPS (KRW) 4,578 4,522 5,303 BPS (KRW) 40,811 43,929 47,828 Performance 1M 6M 12M Absolute (%) (2.8) (3.2) (12.4) Relative to KOSPI (%p) 0.2 (4.6) (11.2) 12MF PE trend 16.0 (X) 12MF PER (LHS) (KRW) 100, price (RHS) 90,000 80, , , , ,000 30, , , Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Source: WISEfn consensus What s new: Earnings met estimates Hyundai E&C s 4Q13 OP was in line with our estimate. However, EBT was less than expected as penalties (W14bn) related to colluding on the Incheon Subway construction project and provisioning (W8bn) for a legal dispute with the Seoul government regarding line no. 7 of the city s subway system were reflected in nonoperating costs. There was no provisioning booked for the housing business and the current project finance (PF) balance stands at W1.7tn and unstarted PF balance at W1.1tn. Management said it plans to begin construction on unstarted PF projects in Gyeonggi province in 1H14. Moreover, the company should be able to ease risks related to overseas sites without much difficulty. Pros: Peaking loss recognition from troubled overseas troubled Hyundai E&C s loss recognition from the troubled sites in Kuwait and the UAE amounted to W110bn in 2011, W140bn in 2012, W90bn YTD 3Q13 and W70bn in 4Q13 alone, which add up to W410bn (see Table 2). Given the loss recognition is almost over for the UAE sites, we believe the overseas losses are now peaking. As the high-margin Jaber Causeway in Kuwait and Puerto la Cruz refinery work in Venezuela started to generate sales in earnest, the overseas COGS ratio should fall 1.7%p YoY to 91.5% in 2014F. While major construction companies in general are now booking considerably larger-than-expected losses, Hyundai E&C is regaining stability without profit erosion after moving ahead of others to tackle the losses. Cons: Lowered predictability for consolidated subsidiary s earnings Hyundai E&C included Hyundai Energy (49% owned) into the consolidation scope in 3Q13, which increased its consolidated debt to W408.9bn. Its year-end net debt was W418bn and indicates a net cash position if excluding Hyundai Energy. The outstanding PF balance at Hyundai Engineering, a consolidated subsidiary, should grow to W720bn from 2Q14 (unstarted PF W115bn) as Hyundai AMCO will be merged into Hyundai Engineering on April 1. The company guidance and our estimates for 2014 are both pre-merger basis. The post-merger controlling interest NP for Hyundai E&C would be ~2% shy of our pre-merger estimate (Table 1). With a rising weighting of housing business at Hyundai Engineering, though within the margin of error, its earnings predictability may get cloudier. (W bn, %, %p) Kyung ja Lee kyungja.lee@truefriend.com Hyungjun Ahn hyungjoon@truefriend.com 4Q13P Chg. 2014F KIS est. Actual Diff. Consensus QoQ YoY KIS Consensus Sales 3,407 4, , (1.1) 15,985 15,558 OP (12.3) OP margin pt pt -0.6pt EBT (23.9) 213 (36.7) (20.9) NP (20.4) 160 (28.6) (20.2)

2 Conclusion: Maintain TP W75,000; Likely to keep relative premium Although it is difficult to achieve an earnings surprise with the largest top line among peers, an earnings shock is also unlikely. For the industry players, profit and loss should become more volatile in 1H14 due to the pending completion of plant orders received from the Middle East (ME) in Since Hyundai E&C is capable of steadily posting a quarterly OP of W200bn+, the stock will likely maintain its relative premium over rivals. The topic for 2014 is whether it could smoothly resolve the housing PF and carry out projects in non-me emerging regions without a hitch. We maintain BUY and a TP of W75,000. Table 1. Hyundai AMCO merger s impact on Hyundai E&C s controlling interest NP Pre-merger Post-merger 2014F 2015F 2016F 2014F 2015F 2016F Hyundai Engineering sales 3,231 3,673 4,185 6,224 6,947 7,695 Hyundai Engineering OP Hyundai Engineering NP Controlling interest NP booked by Hyundai E&C Changes to Hyundai E&C s controlling interest NP -2.5% -2.6% -3.0% Note: 2014 figures are based on the merger date (April 1) Source: Company data, Hyundai AMCO, Hyundai Engineering, Korea Investment & Securities Table 2. Ongoing overseas projects Contract Completion date date Contract value Residual value Additional costs booked Project Progress Q13 2Q13 3Q13 4Q13 Singapore Jurong-Tuas Jun-00 Mar % India Chambal bridge Nov-06 Nov % Singapore Pasir Panjang terminal Oct-07 Jun % Sriranka Colombo port Apr-08 Sep % Libya 400KV transmission May-08 Dec % Libya Alakaliz power plant Nov-08 Jan % Singapore Jurong underground oil tank phase 1 Jun-09 May % U.A.E nuclear power plant Dec-09 May-20 3,354 2, % Qatar Hamad Medical City Feb-10 Aug % Vietnam Hanoi commercial complex May-10 Jun % Libya Sarir-Azdabiya 400KV transmission Jun-10 Apr % Kuwait Oil Company NO.1 Jul-10 Feb-14 1, % U.A.E Borouge 3 Jul-11 Jan-14 1, % Kuwait BOUBYAN SEA PORT PROJECT-PHASE 1 Oct-10 Apr-14 1, % Singapore Twin Peaks Condominium Feb-11 Feb % Borouge 3 polyethylene Feb-11 Mar % Singapore Asia Square tower #2 Apr-11 Aug % Singapore MRT DOWNTOWN LINE STAGE 3 Apr-11 Dec % Indonesia Peusangan 1&2 water power May-11 Jan % Singapore Lucky tower condominium Jun-11 Jan % Almusaib power plant recovery Aug-11 Sep % Singapore south beach Aug-11 Oct % Qatar museum Sep-11 Jun % Libya Tripoly West Power plant Dec-11 Feb-15 1,486 1, % Mongjung-Ⅰ 1,000MW Power plant Dec-11 Oct-15 1, % Saudi Maaden Alumina Mar-12 May-14 1, % Singapore Pasir Lease Condominium #4 Apr-12 Jun % Qatar Lusail express May-12 May-15 1, % Singapore Pasir port Aug-12 Jan % Columbia Beyo Sewage treatment facility Sep-12 Sep % Venezuela Puerto La Cruz refinery Sep-12 Mar-16 1,247 1, % Singapore tunnel NS3 Sep-12 Jun % Singapore Pasir Panjang telecommunication Oct-12 Aug % Kuwait Bubiyan port #1 Oct-12 Oct % Singapore Water town Oct-12 Jul % Kuwait Jabeir Causeway Nov-12 Dec-17 2,206 2, % Algeria Ain Arnat 1200MW(3x400MW) CCPP Nov-12 Feb % King Abulah sports city Dec-12 Dec % Uruguay Punta del Tigre 500MW CCPP Feb-13 Jan % 2

3 Cote d'lvoire Azito power expansion Feb-13 Apr % Singapore Chawan Feb-13 Jan % Indonesia Sumatra 275KV transmission Mar-13 Jul % U.A.E Sarb offshore oil & gas facility Mar-13 Sep-17 2,038 2, % U.A.E Dubai Ferris wheel May-13 May % Turkey Bosporus #3 Jun-13 Oct % Indonesia Sarula power Jun-13 Dec % Uzebekistan Talimazan900MW CCPP Jun-13 Dec % Thailand Alkilbenzen mfr plant Aug-13 Aug % Singapore Marina South dev. Aug-13 Aug % Qatar new port Sep-13 Feb % Total 33,753 19, % Source: Hyundai E&C s 3Q14 business report, Korea Investment & Securities Table 3. Quarterly earnings outlook 1Q12 2Q12 3Q12 4Q Q13 2Q13 3Q13 4Q13P 2013P 2014F Sales 2,706 3,181 3,319 4,119 13,325 2,861 3,471 3,535 4,071 13,938 15,985 YoY (%) (1.1) Civil , ,527 2,527 Construction , ,013 2,013 Housing ,352 1,352 Plants , ,094 3,094 Power , ,588 1,588 (Overseas) 1,257 1,334 1,405 1,699 5,695 1,299 1,450 1,574 1,637 5,960 7,903 (Domestic) 958 1,134 1,124 1,523 4, ,158 1,100 1,441 4,632 4,094 (Hyundai Engineering) , ,616 3,231 (Meedco) Consolidated adjustment COGS ratio Civil Construction Housing Plants Power (Overseas) (Domestic) (Hyundai Engineering) OP (Hyundai Engineering) OPM (%) (Hyundai Engineering, %) EBT NP (Controlling interest NP) Net debt (124) (124) , Note: Figures do not reflect Hyundai AMCO planned for merger on April 1 Source: Company data, Korea Investment & Securities Table 4. Valuation Value 1) OP value 7,391 Remark Hyundai E&C based NOPLAT F Hyundai Engineering based NOPLAT F, considered only 72.6% ownership Target multiple (x) % premium to Kospi PE 2) Invested asset value 550 Disposable SOC shares 3) Seosan land value 400 Book value 4) Net debt F, considered loan ownership of consolidated subsidiary Shareholders value ( ) 8,128 Number of shares (common, 000) 111,356 Value per share (KRW) 73,000 Maintain TP as gap to existing TP is less than 10% Source: Korea Investment & Securities 3

4 Table company guidance vs. KIS estimates 2013 Guidance 2014F (KIS) New orders 21,617 22,265 22,100 - Domestic 4,499 4,786 5,400 - Overseas 17,118 17,479 16,700 (Hyundai Engineering) 5,486 5,500 5,200 Sales 13,998 15,927 15,985 - Domestic 4,958 4,723 4,094 - Overseas 8,980 11,204 11,891 (Hyundai Engineering) 2,616 3,100 3,231 Note: Figures do not reflect Hyundai AMCO planned for merger on April 1 Source: Korea Investment & Securities 4

5 Balance sheet FY-ending Dec. 2011A 2012A 2013F 2014F 2015F Current assets 8,711 9,611 8,968 10,122 11,223 Cash & cash equivalents 1,862 1,855 1,884 1,998 2,144 Accounts & other receivables 4,423 5,128 4,646 5,328 5,955 Inventory 1,283 1,128 1,072 1,230 1,374 Non-current assets 3,161 3,136 3,626 4,071 4,522 Investment assets 1,375 1,232 1,687 1,998 2,322 Tangible assets 1,120 1,144 1,162 1,182 1,203 Intangible assets Total assets 11,872 12,747 12,594 14,194 15,745 Current liabilities 5,773 6,150 5,061 5,945 6,760 Accounts & other payables 3,588 3,774 3,412 4,003 4,444 ST debt & bonds Current portion of LT debt Non-current liabilities 1,736 1,841 2,374 2,589 2,665 Debentures ,248 1,258 1,208 LT debt & financial liabilities Total liabilities 7,508 7,991 7,436 8,534 9,425 Controlling interest 4,203 4,549 4,896 5,331 5,904 Capital stock Capital surplus Capital adjustments (5) (4) (4) (4) (4) Retained earnings 2,675 3,079 3,528 4,063 4,737 Minority interest Shareholders' equity 4,363 4,756 5,158 5,660 6,319 Income statement FY-ending Dec. 2011A 2012A 2013F 2014F 2015F Sales 11,920 13,325 13,938 15, ,864 COGS 10,752 12,076 12,730 14, ,196 Gross profit 1,168 1,249 1,209 1,393 1,668 SG&A expenses Operating profit ,118 Financial income Interest income Financial expenses Interest expenses Other non-operating profit 18 (43) (26) (15) (15) Gains (Losses) in associates, subsidiaries and JV (17) (11) (12) (10) (10) Earnings before tax ,094 Income taxes Net profit Net profit of controlling interest Other comprehensive profit (183) (114) (114) (114) (114) Total comprehensive profit Total comprehensive profit of controlling interest EBITDA ,188 Cash flow FY-ending Dec. 2011A 2012A 2013F 2014F 2015F C/F from operations (156) 28 (25) Net profit Depreciation Amortization Net incr. in W/C (1,110) (813) (575) (202) (183) Others (96) C/F from investing (69) (208) (461) (558) (567) Capex (68) (97) (91) (91) (90) Decr. in fixed assets Incr. in investment (40) (46) (568) (422) (435) Net incr. in intangible assets (1) (3) 23 (10) (10) Others 37 (70) 172 (38) (35) C/F from financing (56) Incr. in equity Incr. in debt Dividends (80) (60) (56) (56) (56) Others C/F from others 1 (13) Increase in cash 121 (7) Key financial data FY-ending Dec. 2011A 2012A 2013F 2014F 2015F Per-share data (KRW) EPS 5,705 4,578 4,522 5,303 6,550 BPS 37,711 40,811 43,929 47,828 52,975 DPS Growth (%) Sales growth OP growth (6.7) NP growth 23.8 (19.8) (1.1) EPS growth 23.8 (19.8) (1.2) EBITDA growth (5.8) Profitability (%) OP margin NP margin EBITDA margin ROA ROE Dividend yield Stability Net debt (539) (500) Debt/equity ratio (%) Valuation (x) PE PB PS EV/EBITDA Note: K-IFRS (consolidated) 5

6 Changes to recommendation and price target Company (Code) Date Recommendation Price target Hyundai E&C (000720) BUY W91, BUY W118, BUY W97, BUY W90, BUY W75, , , ,000 80,000 60,000 40,000 20,000 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep

7 Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance BUY: Expected to give a return of +15% or more Hold: Expected to give a return between -15% and 15% Underweight: Expected to give a return of -15% or less Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings. Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months Overweight: Recommend increasing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Neutral: Recommend maintaining the sector s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Important Disclosures As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of Hyundai E&C. There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance. Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for Hyundai E&C in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from Hyundai E&C in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intends to seek compensation for investment banking services from Hyundai E&C in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in Hyundai E&C s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of Hyundai E&C shares as of January 27, Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analysts covering these companies nor their associates own any shares of as of January 27, Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of Hyundai E&C and is the liquidity provider. Prepared by: Kyungja Lee This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client s judgment, and this report cannot be used as evidence in any legal dispute related to investment decisions. 7