[Click eStock] "Samsung Heavy Industries, Little Room for Upside... Investment Opinion 'Neutral'"

Shinyoung Securities Report
Annual Performance Expected to Show Deficit This Year

[Asia Economy Reporter Minji Lee] Shin Young Securities downgraded its investment opinion on Samsung Heavy Industries from Buy to Neutral on the 3rd and set a target price of 6,000 KRW.

In the second quarter, Samsung Heavy Industries recorded sales of 1.6915 trillion KRW, a 4.5% decrease compared to the same period last year. Operating loss was 707.7 billion KRW, significantly larger than the loss in the same period last year. The detailed breakdown of the operating loss includes drillship losses (454 billion KRW), additional cost input (90 billion KRW), after-sales service costs for quality defects in delivered products (68 billion KRW), and recurring loss excluding one-time costs (95.7 billion KRW).

Researcher Kyung-ah Eom of Shin Young Securities analyzed, "The large-scale loss in Q2 was due to sales decline caused by the COVID-19 pandemic, process disruptions, and inventory asset valuation losses for five unsold drillships." Although the inventory asset valuation loss was an expected loss item, the prolonged inventory processing period for the five drillships due to the drop in oil prices was identified as a risk factor.

As of the end of June, the order backlog stood at 19.9 billion USD. With nearly two years of backlog on a progress basis, the backlog stability is estimated to be relatively high. Projects that the company expects to be competitive include Mozambique LNG, Russia LNG, dual-fuel VLCC, and polar shuttle tankers, with a total scale of about 4 billion USD. The company believes that achieving the order target is fully possible if it succeeds in securing the Bonga project within the year.

However, it seems difficult to guarantee profitability with this volume alone. Researcher Kyung-ah Eom said, "The unit price of the order backlog does not significantly improve operating cash flow, and the prolonged holding period of unsold drillship inventory assets acts as a risk factor," adding, "An annual loss is also expected for this year’s full-year performance."