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Samsung Heavy Industries: Rising Steel Plate Prices to Hurt 2Q22 Earnings

Despite revising down our earnings outlook to reflect the anticipated earnings shock in 1H22, we raise our 12m TP for Samsung Heavy Industries (SHI) by 9.1% from KRW5,500 to KRW6,000 given an upward revision to ROE and changes to 30y KTB (terminal growth rate) and 1y MSB (risk-free rate) yields. We have also reflected changes to our oil price assumptions; oil price has exceeded USD90/bbl, our previously issued bull-case scenario level. We maintain HOLD as our new TP offers upside of just 1.2% from the latest close.

Earnings shock likely in 2Q22 (operating loss of KRW120.6bn)

We estimate 2Q22 consolidated (K-IFRS) revenue of KRW1.77tn (+3.1% YoY) and an operating loss of KRW120.6bn (loss narrows YoY; -6.8% OPM). While our revenue outlook is in line with consensus, we expect operating loss to be significantly larger than the consensus estimate (operating loss of KRW65.8bn). We have assumed KRW50.0bn in provisioning against losses due to higher heavy steel plate prices, given that shipbuilders have recently agreed to a KRW100,000/tonne increase for 1H22 (vs. 2H21). Our assumption may be subject to upward revision, however, in the event of a change in management’s expectations for steel plate prices to see downward stabilization in 2H22.

Labor costs rising alongside feedstock prices

Another concern is that labor costs are rising alongside feedstock (i.e., heavy steel plate) prices. Labor costs account for around 8% of COGS at Korean shipbuilding majors; inclusion of outsourcing costs, essentially labor costs, would drive up this figure to 15%-20%. Labor costs have been on a rapid rise with 1H22 wage levels up 3.8% YoY for welding, 7.3% for painting, and 8.4% for plant piping installation (daily pay currently at KRW289,000).

Order receipts at solid level

As of May, SHI has secured USD3.3bn (19 vessels) in newbuilding orders (nine container ships worth USD1.2bn, 10 LNG carriers worth USD2.2bn), which equates to 37.5% of its annual target.
Source: Business Korea

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