[Click eStock] "Geumhwa PSC, Growth Expected to Continue Due to Increased Maintenance Volume"

Hana Financial Investment Report
Labor Cost Adjustment, Profit Margin Decline Inevitable

[Asia Economy Reporter Minji Lee] Hana Financial Investment maintained a buy rating and a target price of 33,000 KRW for Geumhwa PS on the 28th. Although a decline in profit margins is inevitable due to labor cost adjustments, the growth trend is expected to continue thanks to an increase in maintenance volume.

In the second quarter, Geumhwa PS recorded sales of 90.9 billion KRW, a 43.1% increase compared to the previous year. Sales in the routine maintenance sector rose 58.7% year-on-year to 78 billion KRW, forming the basis for the improved performance. This was because scheduled preventive maintenance was concentrated in the second quarter at business sites such as Taean, Dangjin, and Yeongheung. Except for a decline in auto parts sales due to a drop in customer plant operating rates, overall performance was solid.

Operating profit reached 20.4 billion KRW, up about 68% from the previous year. The profit margin increased by 3.3 percentage points year-on-year to 22.4%. Although costs classified as employee salaries rose 17.5% year-on-year to 24.3 billion KRW, operating results improved thanks to growth concentrated in the peak season.

Researcher Jaeseon Yoo of Hana Financial Investment explained, “Routine preventive maintenance (O/H) work was concentrated in the second quarter, significantly increasing routine maintenance performance compared to the previous year. Although a decline in profit margin relative to external growth is inevitable this year due to labor cost adjustments, the growth trend is expected to continue annually as the volume of scheduled preventive maintenance increases.”

At the beginning of the year, five thermal power subsidiaries of Korea Electric Power Corporation signed an agreement on a ‘pilot project for appropriate labor cost payment,’ which adds 5% of routine maintenance construction costs as labor costs to cooperating companies in the routine maintenance sector. This project will be carried out over two years from January this year to December next year. Considering that the profit margin was defended in the second quarter, it appears that the increased costs are being appropriately passed on to the contract amounts.

Researcher Yoo said, “Performance in the core business area of routine maintenance heavily depends on the scheduled preventive maintenance timetable of thermal power plants, leading to increased volatility in performance on a biennial cycle recently. However, even during periodic low seasons, the profit level is expected to be sufficient to secure the annual dividend scale.”