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Hyundai E&C (000720):3Q results,No negatives

发布时间:2015-10-28    研究机构:三星证券

Hyundai E&C during market hours on Oct 23 announced 3Q results showingoperating and net profits of KRW264.4b and KRW163b, respectively—the formeredging consensus (KRW254.3b) and the latter in line (KRW161.8b). Absent theproactive recognition of a KRW40b fine imposed by the Fair Trade Commission thatcould have been reflected in 4Q, net profit would have surpassed the marketforecast substantially. Hyundai E&C shares closed up 3.1% on the solid results.

Key positives include: 1) greater collection of accounts receivable—includingaccrued receivables; 2) a drop in net debt; 3) improvement in plant COGS ratio; and4) a stronger performance from Hyundai Engineering.

With results meeting forecasts for a second straight quarter and Hyundai E&C’sfundamentals improving enough to ease concerns, shares appear undervalued,trading at 7.5x 2016 P/E. We reiterate BUY with a target price of KRW54,000.

WHAT’S THE STORY?

3Q review: Hyundai E&C today reported strong 3Q results, with consolidated salesfalling 2.2% q-q due to seasonality, but rising 10.6% y-y. Consolidated gross margin hit8.5% (vs 8.2% in 2Q), while operating margin hit 5.6% (up 0.3%pts q-q and 0.2%pts y-y).

New orders uninspiring ytd, but to meet 90% of full-year target: Over 1Q-3Q,Hyundai E&C met just 54% of its full-year new order target. However, this figure shouldrise to 89% by year-end, with the constructor taking KRW24t in new orders (vs a target ofKRW27t), backed by a rise in domestic housing projects and three promising overseasorders—namely an infrastructure project in Asia, a new refinery in an emerging market,and a project to establish an electricity grid in the Middle East.

Plant COGS ratio normalizes in 3Q: Hyundai E&C’s plant COGS ratio, which washigh until 1H due to provisioning for problematic projects (eg, the Kuwait KOC and UAEBorouge 3 ones), improved sharply to 88.9% in 3Q (from 95.3% in 2Q15 and 100.5% in3Q14). The ratio should keep improving through 4Q and beyond, as the management sayssaid the aforementioned projects should not incur further cost overruns, and claims for anextension of time (EOT) at the Maaden plant are nearing settlement. Meanwhile,Hyundai Engineering saw its gross and operating margins improve 1.4%pts and 0.9%ptsq-q, respectively, to 8.8% and 6.4%.

Net debt down q-q led by rise in collection of accounts receivable: Contrary tomarket concerns, Hyundai E&C’s accounts receivable (including accrued receivables)were down KRW200b q-q at end-3Q (or down KRW500b if excluding the impact of wondepreciation). Accordingly, the firm’s net debt declined to KRW7b at end-3Q (vsKRW212b at end-2Q). We expect the firm’s accrued receivables and net debt to continuedeclining in 4Q and beyond, led by the further collection of housing-related accountsreceivable and smooth progress at overseas projects.

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