The authors are analysts from Shinhan Investment Corp. You can be reached at email@example.com or firstname.lastname@example.org. – Ed.
Preview of the first quarter of 21: The result should be solid thanks to the housing business
We now assume that GS Engineering & Construction will report sales of KRW 2.5 billion (+ 2% YoY) and an operating profit of KRW 224.9 billion (+ 32% YoY) in the first quarter of 21 , with solid profits likely to be driven by the housing business. Gross margins on residential projects are estimated at 20%, with provisions for contingencies being expected to be reversed with rapid pre-sale of apartments and run-off profits after construction is completed through effective control of raw material and labor costs. Compared to third quarter 20 (gross margin reached 23.5% after the completion of the Han River Metro Xi project) and fourth quarter 20 (30.5% after the completion of the Gran City Xi project), gross margins for most large corporations should be something Lower and closer to the 2nd quarter of 20, residential projects that are scheduled for completion in the first quarter of 21 focus on reconstruction and renovation instead of new buildings.
On the non-operational side, GS Engineering & Construction will post gains from currency translation in Q1 21 versus losses in Q4 20 (KRW 118.1 billion) due to the year-to-date increase in dollar value.
Outlook for 2021: start of residential real estate and new business
For the year 2021 we forecast a turnover of 10.2 billion KRW (+ 0% year-on-year) and an operating result of 976.5 billion KRW (+ 30% year-on-year). Rising sales of residential real estate and new business (GS Inima Environment and modular structure) are likely to impact the year-on-year decline in sales in plant / energy projects following the completion of the GS Caltex MFC project (86% completed from 4th quarter of 20) and LG’s petrochemicals Chem balance complex in Yeosu (87% from 4Q20) within 1H21. Despite stagnating sales, the operating result should increase visibly due to the sales growth in high-margin residential construction and new business. In the meantime, a rise in the value of the Brazilian real from its current sluggish level is likely to result in an upward revision of the forecasts for GS Inima Environment.
Keep BUY for the target price of KRW 56,000
We are maintaining our BUY rating and target price of KRW 56,000 based on 2Q21F-1Q22F BPS and a target PBR of 1.0x (the average PBR recorded during the past uptrend in the real estate ROE). GS Engineering & Construction added to the upbeat forecast for the housing business to a brisk pre-sale, revealing plans for further diversification of new business areas (currently GS Inima Environment and modular construction) for the sale of intangible / intellectual property rights and trading in small streams at its youngest shareholders’ meeting. We think it’s positive that the company has taken the lead among major domestic builders in adapting to changes in the industry’s profit structure. From 2022 onwards, the long-awaited advances in the new city project in Vietnam should help to further improve long-term revenue visibility.