[Click eStock] "GS Geonseol, Overseas Slump Offset Domestically... Possible Rebound from 3Q"

2Q Operating Profit 165.1 Billion KRW... 20% Decrease YoY
In Line with Market Expectations... 'Average' Performance Amid Industry Downturn
Decent Sales Performance... Possibility of Rebound in Q3

[Asia Economy Reporter Minwoo Lee] GS Engineering & Construction posted somewhat lackluster results in the second quarter. From the third quarter, sales in residential construction are expected to increase, aiming for improved performance.

On the 30th, Korea Investment & Securities maintained a buy rating and a target price of 30,000 KRW for GS Engineering & Construction. The closing price the previous day was 26,650 KRW. Although the second quarter results this year were weaker compared to the same period last year, they met market consensus, leading to this assessment.

GS Engineering & Construction recorded sales of 2.5474 trillion KRW and operating profit of 165.1 billion KRW in the second quarter of this year. Sales decreased by 1% and operating profit by 20% compared to the same period last year, but these figures were close to the consensus estimates of 2.5193 trillion KRW in sales and 172.9 billion KRW in operating profit. In the Karbala refinery project site in Iraq, additional costs exceeding 100 billion KRW were reflected, resulting in a gross loss of 54 billion KRW in the plant division. This contrasts with a gross profit of 62 billion KRW in the same period last year. Such losses were partially offset by domestic operations. Through completion settlements and profit sharing from development, the residential construction division recorded a gross profit margin of 20%, the highest quarterly level since 2011. The gross profit in the construction division also increased by 18.5% year-on-year to 301 billion KRW.

There is analysis suggesting that sales and profitability could rebound from the third quarter. Due to a continuous decline in the number of pre-sold units since 2015, residential construction sales had decreased for six consecutive quarters year-on-year, but are expected to turn upward starting in the third quarter. With an increased proportion of high-profit domestic housing and new business sales, both sales and profitability are expected to improve from the third quarter. The cumulative number of pre-sold units in the first half was 14,500, achieving 57% of this year's target and 87% of last year's pre-sale performance, which is also positive. However, the decline in oil prices and the spread of COVID-19 have somewhat lowered the order momentum across the construction industry, which is considered a downside.

Kiho Kim, a researcher at Korea Investment & Securities, analyzed, "Considering the already low proportion of overseas sales, the conservative reflection of overseas site losses in the second quarter, and the expanding trend of domestic housing pre-sales, the visibility of GS Engineering & Construction's performance in the second half is very high. Although it is unfortunate that short-term momentum is difficult to expect due to ongoing real estate regulations and the spread of COVID-19, stable performance and valuation attractiveness remain valid."