We lift our TP on Samsung Heavy Industries (SHI) to KRW6,000 (12-month forward BVPS x target P/B of 0.79x) to reflect revisions to: (1) ROE; (2) market risk premium applied by KB Securities (5.93% in 2020 → 7.28% in 2021); (3) earnings forecast; and (4) beta adjustment method, in addition to updating risk-free rate and terminal growth rate given market rate changes. Despite the upward revision, we maintain HOLD as our TP falls short of the Jan 7 closing price.
Revisions mostly due to no longer applying ROE discount and revising beta adjustment methodology
We no longer are applying a 30% ROE discount from the upcycle average for shipbuilding stocks given significant order intakes at end-2020 and growing expectations for an economic recovery with the development and rollout of COVID-19 vaccines. Furthermore, we revised our beta adjustment methodology, and now apply 30% of an individual stock’s beta and 70% of market beta given the recent increase in volatility. (Previously, we had applied the weighted average of individual stock beta (R2) and market beta (1.0).)
4Q20 OP to miss consensus
We estimate 4Q20 K-IFRS consolidated revenue at KRW1.75tn (-19.0% YoY) and operating loss at KRW63.6bn (loss narrows YoY; OPM 3.6%)—with both to fall short of consensus. We believe decreased output due to a thin order backlog and construction loss provisions on new orders will weigh on results. 4Q20 construction loss provisions are estimated at just KRW5.8bn as orders secured during the quarter were mostly LNG carriers and equipment. However, valuation losses on drillship inventories should be reflected due to the KRW appreciation.
2020 order intakes total USD5.5bn (i.e., 65% of guidance)
For full-year 2020, SHI secured 36 vessel orders (15 tankers, 19 LNG carriers (including equipment) and two other vessels) totaling USD5.5bn. This equates to 65% of the guidance of USD8.4bn announced in early 2020. Order intakes were flat at approximately USD1bn until October. However, SHI avoided the worse by securing major LNG carrier orders from Russia and Mozambique at year-end.
Source: Business Korea by Jeong Dong-ik
