Korea Shipbuilding & Offshore Engineering: Wait for Upturn in Energy Demand

3Q20OP misses consensus by 27.6% at KRW40.7bn (-56% QoQ)

Korea Shipbuilding & Offshore Engineering posted operating profit of KRW40.7bn (-56.2% QoQ) on sales of KRW3.5tr (-11.9% QoQ) for 3Q20, missing the consensus estimate of KRW56.2bn by 27.6%. Sales fell on a QoQ basis due to; 1) the decline in KRW-based sales following a 2.6% QoQ drop in the average USD/KRW exchange rate; and 2) fewer working days.

Operating profit fell short on: 1) increased fixed cost burden from the decline in sales; 2) KRW25.7bn in one-off expenses caused by KRW appreciation; and 3) KRW13bn in provisions for construction losses. Meanwhile, the decline in steel prices and subsequent improvement in COGS ratio led to a one-off reversal of KRW33.9bn in provisions. Order intake for the year to 3Q20 came in at USD5.48bn (-35.4% YoY), reaching 41.8% of the company’s lowered guidance of USD13.09bn (vs. previous USD19.5bn) for the full year.

2020 order backlog forecast at USD32.85bn (+1.9% YoY)

Order backlog for full-year 2020 is expected to approach previous year levels at USD32.85bn (+1.9% YoY). The company needs to secure additional merchant vessel orders worth USD5.6bn within the remainder of the year for order backlog to reach on par with 2019. Order intake expected within the year, based on letters of intent and optional orders, amount to USD6.2bn. The company is likely to win the order for nine LNG carriers from Mozambique (USD1.7bn) in the near term.

Retain BUY for a revised-down target of KRW93,000

We retain our BUY rating on Korea Shipbuilding & Offshore Engineering. Our target price is revised down to KRW93,000, based on the 12-month forward BPS forecast of KRW162,595 and a target PBR of 0.6x (10% premium applied to the average PBR of 0.52x recorded on sluggish order intake in 2016). Shares could temporarily rebound in 4Q20 on news of new order intake based on letters of intent and optional orders.

Actual improvement in order intake and share price should start in earnest from 2H21. As tankers and gas carriers account for 75% of the company’s total order intake, we urge investors to wait for confirmation of an upturn in energy consumption on economic recovery in emerging markets in 2H21.
Source: Business Korea