We cut our 12m TP for KSOE by 15.6% from KRW160,000 to KRW135,000 (12m fwd BVPS x 0.96x P/B). The downward revision reflects: (1) a lowered ROE, (2) changes to total equity after applying 12m fwd period and revising earnings forecasts and (3) adjustments to cost of equity due to changes in risk-free rate (1y MSB yield) and beta. Specifically, the premium for avg. ROE was halved (20% →10%), as the surge in order receipts since 4Q20 should now undermine order intake growth as the low base effect fades. However, we maintain BUY given that our revised TP offers 32.4% upside potential (vs. Sep 24 closing price).
Order intake of USD21.1bn exceeds annual target
KSOE secured USD21.09bn in orders through August (USD17.71bn for Shipbuilding, USD1.77bn for Offshore, USD1.58 for Engine/Machinery). This equates to 125.9% of the full-year USD16.75bn target (119.1% of Shipbuilding target achieved). With the annual goal already achieved, we expect management to revise its bidding strategy and focus on winning orders with better margins.
Containerships, LNG/LPG carriers driving order receipts
We attribute the robust performance to orders for containerships and LNG/LPG carriers. As of end-August, KSOE won orders for 58 containerships, 26 LNG carriers and 48 LPG carriers, in sharp contrast to the poor performance the same period last year (zero containerships, six LNG carriers, eight LPG carriers). Accordingly, the order backlog grew to USD33.08bn (end-August), including USD28.27bn for Shipbuilding and USD1.83bn for Offshore. Based on the company’s revenue guidance, KSOE has secured 2.5 years of work.
Focus on increase in newbuilding prices, direction of feedstock prices
With its ample order backlog at present, KSOE may lose order intake momentum. As such, we recommend focusing on the uptick in newbuilding prices and the direction of feedstock prices. Specifically, newbuilding prices need to be monitored to determine if the increase in prices can offset rising costs and result in better margins. In addition, we are closely examining if the recent drop in iron ore prices will pull down heavy steel plate prices from 2022, which should trigger a reversal in loss provisions that would boost earnings.
Source: Business Korea