[Click eStock] "Samsung Heavy Industries, Financial Structure Deterioration... Starting with SG&A Expense Reduction"

[Asia Economy Reporter Ji Yeon-jin] Shinhan Financial Investment announced on the 6th that it maintains a 'Neutral' investment rating on Samsung Heavy Industries, citing concerns over continued losses, deterioration of financial structure due to delays in drillship sales, and dilution of shareholding from a rights offering.

Samsung Heavy Industries posted an operating loss of 506.8 billion KRW in the first quarter of this year, continuing its deficit. Sales amounted to 1.6 trillion KRW, down 13.8% compared to the same period last year. This was due to one-time costs including a drillship impairment loss of 214 billion KRW, construction loss provisions of 123 billion KRW, cost increases of 119 billion KRW from rising steel prices, and a 36 billion KRW allowance for doubtful accounts related to Ichthys. Sales also declined due to last year's sluggish orders and delays in some LNG carrier projects.

Samsung Heavy Industries plans to conduct a 1 trillion KRW rights offering following a capital reduction without compensation in July this year. The capital reduction will be carried out by adjusting the par value (from 5,000 KRW to 1,000 KRW), not by stock consolidation. The capital of 2.5 trillion KRW will be reclassified as capital surplus. There will be no change in the per-share corporate value or reference price for existing shareholders. However, the expected dilution rate from the 1 trillion KRW rights offering (assuming an offering price of 5,370 KRW) is projected at 22.8%.

While an increase in advance payments is expected this year due to rising orders, working capital is forecast to increase again next year. The timing for utilizing the proceeds from the rights offering for investments in eco-friendly technology and smart yard facilities to enhance corporate value is anticipated to be after the drillship sale or in 2023.

Hwang Eo-yeon, a researcher at Shinhan Financial Investment, pointed out, "To achieve a turnaround to profitability in 2023, reducing selling and administrative expenses through management efficiency must precede," adding, "Compared to Daewoo Shipbuilding & Marine Engineering, which has a similar sales scale, Samsung Heavy Industries' recurring selling and administrative expenses (recurring S&A ratio: Daewoo Shipbuilding & Marine Engineering 3.2%, Samsung Heavy Industries 5.6%, Hyundai Mipo Dockyard 3.4%) are about twice as high."