Financial stability has improved due to a significant drop inunclaimed construction costs
Upside potential for new orders as new market opens
Maintain Buy rating and unchanged TP of KRW55,000
What’s new? (1) Unclaimed construction costs fell significantly in 1Q15, implying animprovement in Hyundai E&C’s financial stability. Unclaimed construction costs cameat KRW2.6trn in 1Q15 (-16.2% q-o-q) representing 23% of its parent-based revenue.(2) There is a new market for Hyundai E&C given its track record in Iran. We think themarket will generate upside potential in 2016e/2017e on overseas new orders/margins.(3) Overseas projects that have yet to start, such as Venezuelan and Uzbekistan GTLprojects, may hinder growth if a recovery in the price of oil delays projects further.
Unclaimed construction costs to decline in 2016e. Our greatest concern in relationto overseas projects is incremental unclaimed construction costs, which negativelyaffected the company’s share price in 4Q15. However, the share price has rebounded17% since the 4Q earnings result on 27 January (vs. KOSPI up 3%) as unclaimedconstruction costs fell significantly. We expect unclaimed construction costs to continueto decline, reaching KRW2trn (-23% y-o-y) in 2016e, as Hyundai E&C begins to rolloutthe launch of its overseas projects. Hyundai E&C has been suspending work onoverseas projects if it has not been paid for work in progress.
Sanctions on Iran have been officially lifted (CNN, 16 January 2016). Iran is thefourth largest country in terms of oil reserves (The Wall Street Journal, 21 February2016). We do not think that new orders will be placed in early 2016 but Hyundai E&Chas a strong track record, with USD3.5bn worth of orders in Iran; therefore, we believethis could provide an opportunity for it to secure new orders in the future.
2016 guidance. Hyundai E&C guided KRW27.3trn worth of new orders in 2016(+37.9% y-o-y), which we think is quite aggressive. Despite a lower housing supplyplan, it is quite aggressive in overseas new orders (+60.1% y-o-y), which we think isunlikely to be achieved unless the oil price reaches at least USD50 per barrel.However, 2016e revenue guidance seems conservative, as Hyundai E&C considersoverseas projects that have not started as not being reflected in 2016e earnings.
We maintain our Buy rating and unchanged TP of KRW55,000. Hyundai E&C’sfinancial stability is enhanced with the stock trading at a historical low PB of 0.7x. Wereflect one-off costs of KRW80bn in the company’s civil engineering division, whichresults in us lowering our 2015e EPS by 26.5%. We continue to use the Gordon growthmodel to derive our target price and apply our target multiple of 0.98x 2016e PB.for details regarding our valuation. Downside risks include: (1) Afurther drop in the oil price, which could delay new orders from the Middle East; and (2)a potential regulation of the redevelopment market, capping house prices in Korea.
Financial stability has due to drop inunpaid construction work
Profit potential for new orders as new market opens
Maintain Buy rating and recommendation TP of AFW55,000
What's new? (1) Unplanned Construction Fell Fell Felling in 1Q15, Implying Anying in Hyundai E&C's Financial Stability. Uncategorized Construction CAMEAT KRW2.6TRN in 1Q15 (-16.2% q-o-q) profit 23% of its parent-based revenue. (2) There is a new market for Hyundai E&C Given its Track Record in Iran. We Think Themarket Will Generate Expected Potential in 2016e/2017 E on Overseas New Orders/Margins. (3) Overseas Projects That Have Yet to Start, such as Venezuela and Uzbekistan GTL Projects, May Hinder Growth If A Recovery in the Price of Oil Refuge Projects Begins.
Unlisted construction work to be carried out in 2016e. Our Greatest Influences in Relationships to Overseas Projects is Unrelated Construction Awards, which Negatively Affected by the Company's share price in 4Q15. However, the share price has rebounded 17% since THE 4Q SURPRISE RESULT ON 27 January (vs. KOSPI up 3%) as UnclaimedConstruction Fell Fell Fell. We Expect Unplanned Construction Expected to Continue to Continue to Continue, Expected KRW2TRN (-23% Y-O-Y) in 2016e, as Hyundai E&C Collected to Rollout the Launch of Its Overseas Projects. Hyundai E&C has been suspending work onoverseas projects if it has not been paid for work in progress.
Feeling on Iran Have Been Overcoming (CNN, 16 January 2016). Iran is the largest country in terms of oil producers (The Wall Street Journal, 21 Febrary2016). We do not think that new orders will be placed in early 2016 but Hyundai E&Chas a strong track record, with USD3.5bn worth of orders in Iran; wishes, we believe this could provide an Opportunity for it to secure new orders in the future.
2016 guidance. Hyundai E&C guided KRW27.3trn worth of new orders in 2016 (+37.9% Y-o-y), which we think is quite impressive. Supplying a Lower Housing SupplyPlan, it's quite profitable in overseas new orders (+60.1% Y-o-y), which we think islanders to be unless the oil price is sold at least USD50 per Barrel.However, 2016 e-revenue guidance notice, as Hyundai E&C soversea projects that have not started as not being motivated in 2016e revenue.
We maintain our buy rating and recommendation TP of AWW55,000. Hyundai E&C's Financial Stability is Enhanced with the Stock Trading at a Historical Low PB of 0.7x. Wereflect one-off competition of KRW80bn in the company's civil engineering division, whichresults in us defeat our 2015e EPS by 26.5%. We continue to use the Gordon growthmodel to derive our target price and apply our target multiple of 0.98x 2016e PB.for details downloaded our mood. Downside incentives include: (1) Afurther drop in the oil price, which could delay new orders from the Middle East; and (2) a potential regulation of the redevelopment market, capping house restructuring in Korea.
