KSOE: 1Q22 Review: Another Earnings Shock

The author is an analyst at KB Securities. He can be contacted at newday@kbfg.com. — Ed.

Operating loss of KRW 396.4 billion in 1Q22

– KSOE recorded consolidated revenue of 3.91 tn KRW (+6.1% YoY) in 1Q22 (K-IFRS) and an operating loss of 396.4 billion KRW (going red over one year; -10.1% OPM).

— Revenues and operating loss were well below the market consensus. In fact, the loss even exceeded our estimate, which was 10 times greater than the consensus.

— In addition to still low shipbuilding prices and lower revenues resulting from production suspensions, provisions against rising Russian steel and bond prices and costs resulting from a fatal accident added to operating loss.

— In 1Q22, one-time losses/gains reached KRW 324.7 billion/KRW 67.4 billion. Excluding exceptional items, the operating loss would be approximately KRW 139.1 billion.

Hyundai Heavy Industries generates a profit shock with an operating loss of KRW 217.4 billion

— Subsidiary HHI recorded consolidated revenue in 1Q22 (K-IFRS) of 2.002 tn KRW (+0.7% year-on-year) and an operating loss of 217.4 billion KRW (turning red year-on-year; -10.9% OPM).

— Sales missed the consensus by 14.2%, depressed by the suspension of production resulting from a fatal accident. The operating loss is 18.3x higher than consensus due to lower revenue, low-priced order building and provisions.

Hyundai Mipo Dockyard reports operating loss of KRW 61.8 billion

— The subsidiary HMD recorded in 1Q22 (K-IFRS) consolidated revenue of KRW 876.0 billion (+27.9% year-on-year) and an operating loss of KRW 61.8 billion ( change to red over one year; -7.1% OPM).

– As revenue slightly beat consensus on the back of shipbuilding volume growth and higher exchange rates, OP largely missed provisions for rising commodity prices and sanctions on Russia.

New orders in 1Q22 at 8.88 billion USD (45.7% of the annual target)

— KSOE recorded new orders of 8.88 billion USD in 1Q22, including 7.68 billion USD for shipbuilding (+37.9% year-on-year) and 1.20 billion USD for engines and machinery (+109 .1% YoY), reaching 45.7% of its annual target of USD 19.45 billion.

— HHI won $3.29 billion in orders, including $2.09 billion in shipbuilding orders (-26.3% year-on-year), reaching 29.0% of its annual target. HMD and Hyundai Samho Heavy Industries received orders worth $1.52 billion (+0.6% YoY) and $4.07 billion (+232.9% YoY) respectively.

— Taking into account an additional order intake of $2.5 billion in April, shipbuilding orders have already exceeded $10.0 billion this year.

Plans to become an operational holding company in the medium and long term

— During the conference call, KSOE announced its intention to convert into an operational holding company by strengthening internal operations and expanding investment in key technologies.

— KSOE aims to increase manufacturing capabilities of core equipment components (beyond design subcontractor) and increase investment in future key shipbuilding/marine technologies.

– KSOE disclosed its target of KRW 500.0 billion in trading revenue within five years and KRW 1.0 billion in the medium to long term.

— If the plans materialize, the gross undervaluation of KSOE compared to its peers/subsidiaries should reduce.

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