Latest GS E&C News
Oct 28, 2022
GS E&C: 3Q22 Results Fall Short of Expectations Share GS E&C: 3Q22 Results Fall Short of Expectations By Chang Moon-joon Recommend BUY, TP of KRW30,000 We maintain BUY on GS E&C but lower our TP by 35.5% to KRW30,000 (0.48x 12m fwd P/B) to accommodate a rise in COE (10.4%→11.2%) and a decline in ROE (8.6%→7.3%) following earnings estimate revisions (2022E, 2023E, 2024E NP attributable to controlling interests adjusted by +7.2%, -29.8%, and -25.6%, respectively). Disappointing performance amid weak sentiment towards sector; Visibility over share-price rebound limited, but concerns sufficiently priced in As the market for real estate finance worsens due to issues related to Legoland Korea Resort, investor sentiment toward players with substantial exposure to residential/housing construction is unlikely to see significant improvements for the time being. In the case of GS E&C, visibility over a share-price rebound appear limited, given that earnings were sluggish in 3Q22 due to the worsening of the COGS-to-sales ratio for the Housing unit and meaningful improvements before year-end are unlikely. However, in the case of large construction players, there is low probability of default since a significant portion of housing construction projects are carried out under completion guarantee. Moreover, once the current liquidity crunch is resolved, the market share of large players are likely to increase significantly compared to small and medium-sized construction firms. We believe market concerns have been fully reflected (shares trading at 0.3x 12m fwd P/B) and that easing of uncertainties in financial markets and improvements in Building/Housing COGS-to-sales ratio would mark the start of a share-price rebound. 3Q22 results sluggish due to worsening of COGS-to-sales ratio GS E&C posted 3Q22 consolidated revenue of KRW2.95tn (+36.0% YoY, -3.1% QoQ), in line with market expectations, but OP came in at KRW125.1bn (-17.8% YoY, -23.9% QoQ), missing consensus by a wide margin. The sluggish performance came as a result of an increase in COGS-to-sales ratios for several housing construction projects amid continued pressures of higher raw material prices, and a subsequent decline in Building/Housing GPM (14.6% in 1Q22 → 17.7% in 2Q22 → 10.1% in 3Q22). Housing supply: 16,000 units YTD as of end-3Q22 As of end-3Q22, housing supply stood at 16,000 units YTD (vs. full-year target of 27,000 units). Taking into account the company’s 4Q22 target of 11,000 units and that redevelopment/reconstruction projects account for much of the order backlog, GS E&C is likely to announce annual housing supply target of around 25,000 units for 2023. POPULAR
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