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KSOE: 4Q21 Earnings Shock Likely on Lawsuit-Related Loss

Cut target price to KRW125,000; Maintain BUY

We cut our 12m TP for KSOE by 7.4%, from KRW135,000 to KRW125,000 (based on 12m fwd BVPS and 0.95x target P/B), in light of the likely earnings shock in 4Q21, a decrease in shareholders’ equity (change to 12m fwd period), changes to 1y MSB yield (risk-free rate) and 30y KTB yield (terminal growth rate), and an adjustment to market risk premium (7.37% for 2021 → 7.16% for 2022). We maintain BUY, as our new TP offers 24.4% potential upside (vs. last close).

2021 order intake doubled YoY to USD25.01bn

KSOE’s order intake for 2021 amounted to USD25.01bn (USD21.05bn in newbuilding orders including specialized vessels, USD1.82bn in offshore plant orders, and USD2.08bn in engine/machinery orders), more than double the figure recorded in 2020 (USD11.37bn). Shipbuilding/Offshore revenue-based order backlog is estimated to have increased from USD19.23bn at end-2020 to USD29.11bn at end-2021 (2.1x 2022E revenue or 25 months of work).

4Q21 preview: Earnings shock likely

We forecast 4Q21 consolidated (K-IFRS) revenue at KRW4.5tn (+26.0% YoY) and operating loss of KRW429.5bn (turn to red YoY; -9.5% OPM); our revenue estimate is 12.2% above the market consensus while our estimate for operating income falls well below the consensus (operating profit of KRW50.3bn). Revenue will likely enjoy a boost from the increase in order backlog and favorable exchange rates, while earnings should take a hit from loss provisions for a lawsuit over ordinary wages.

One-off loss of KRW700bn expected

KSOE recently lost in a lawsuit filed by its employees. Workers claimed that a number of items in ordinary wages have not been paid. Loss provisions are to be set once an estimate of total amount due is ascertained; we have assumed a 4Q21 one-off loss of KRW700bn (i.e., KRW500.0bn operating and KRW200.0bn non-operating loss).
Source: Business Korea

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