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Hyundai Heavy Industries Holdings: Valuation and Dividend Merits Intact

Maintain BUY; Raise target price to KRW67,000

We raise our 12m fwd TP for HHIH by 11.7% from KRW60,000 (post-stock split basis) to KRW67,000 (12m fwd BVPS x 0.73x target P/B). Our TP was bumped up to reflect upward revisions to earnings estimates (2021E/2022E NP attributable to controlling interests up 4.1%/4.3%), a change in market risk premium (5.93% for 2020→7.37% for 2021) and necessary adjustments to assumptions (e.g., risk-free rate, terminal growth rate) due to market rate changes. We maintain BUY as our new TP offers 17.8% upside (24.5% if dividends included) against the Apr 6 closing price.

Trading suspended until Apr 12 due to stock split

HHIH will split its stock, lowering par value from KRW5,000 to KRW1,000. Trading will be suspended from Apr 8 to Apr 12 and then resume on Apr 13 with the listing of post-split shares. The purpose of the split seems to be to boost trading via an increase in the number of outstanding shares. We note that the daily average trading value for HHIH stock has hovered at KRW18.4bn (0.4% of market cap) over the past three months.

Earnings surprise expected in 1Q21

We forecast 1Q21 revenue at KRW6.18tn (+8.1% YoY) and OP at KRW382.1bn (turn to black YoY; 6.2% OPM). Both estimates are above the market consensus by large margins. Hyundai Oilbank operating income is expected to turn around from a KRW563.2bn loss in 1Q20 to a KRW283.7bn profit thanks to gains on inventory valuation (oil price jumps) and improving refining margins. Hyundai Global Service and Hyundai Construction Equipment are likely to post solid results on the back of improving shipbuilding market conditions and brisk excavator sales in China and other emerging countries.

Valuation and dividend merits intact

HHIH stock is currently trading at a compelling 0.6x 2021E P/B. Our 2021 DPS estimate is KRW3,700 (6.5% yield), one of the highest among major holding companies. The company may raise its DPS if improvements in Hyundai Oilbank earnings boost HHIH dividend income.
Source: Business Korea

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