We lift our TP on Korea Shipbuilding & Offshore Engineering (KSOE) to KRW140,000 (12-month forward BVPS x target P/B of 0.85x) to reflect revisions to: (1) ROE; (2) market risk premium applied by KB Securities (5.93% in 2020 → 7.28% in 2021); (3) earnings forecast; and (4) beta adjustment method, in addition to updating risk-free rate and terminal growth rate given market rate changes. Despite the recent rally, we maintain BUY as shares offer an upside of 18.1% based on our revised TP.
Revisions mostly due to no longer applying ROE discount and revising beta adjustment methodology
We no longer are applying a 30% ROE discount from the upcycle average for shipbuilding stocks given significant order intakes at end-2020 and growing expectations for an economic recovery with the development and rollout of COVID-19 vaccines. Furthermore, we revised our beta adjustment methodology, and now apply 30% of an individual stock’s beta and 70% of market beta given the recent increase in volatility. (Previously, we had applied the weighted average of individual stock beta (R2) and market beta (1.0).)
4Q20 OP to miss consensus
We estimate KSOE will post 4Q20 K-IFRS consolidated revenue of KRW3.91tn (-10.0% YoY) and OP of KRW25.6bn (-85% YoY; 0.7% OPM). While revenue should slightly exceed consensus, OP should fall short. We believe decreased output due to the thin order backlog, coupled with KRW appreciation and construction loss provisions for new orders (KRW93.5bn on a consolidated basis; 3% of non-LNG carrier order value), should weigh on results.
2021 new order guidance of USD16.7bn and revenue of KRW15.6tn
Recently, the three shipbuilders in the Hyundai Heavy Industries (HHI) group released new order and revenue guidance for 2021. Combined new order and revenue guidance for these three companies and KSOE totals USD16.7bn (85.9% of initial 2020 guidance) and KRW15.6tn (93.4% of initial 2020 guidance), respectively. In particular, HHI, KSOE’s key subsidiary, disclosed new order guidance of USD8.89bn, including USD7.18bn for shipbuilding and USD1.6bn for engine and machinery.
Source: Business Korea