[Into the Stock] DL E&C, PER 5x Value Sufficiently Undervalued "Has Differentiating Weapon"

[Asia Economy Reporter Lee Seon-ae] Investor interest in the construction sector is rising due to the government's policy to expand housing supply. Among construction stocks, 'DL E&C' is highlighted as an undervalued stock with attractive potential. Although the stock price, which closed at 138,000 KRW on the 2nd, remained flat on the 3rd, the prevailing view is that the current price is undervalued compared to its growth potential.

◆Focus on Housing… Maximizing Profitability= DL E&C has increased profitability by focusing on the housing business after a slump in its plant business. As a result, it has recorded a stable operating profit margin in the 10% range (based on the construction division) from 2019 to the present. In particular, DL E&C's housing business cost ratio has maintained a relatively low level in the high 70% to low 80% range. Considering the plan to expand the proportion of self-developed projects in the future, further profitability improvement is expected.

In the first half of this year, DL E&C achieved 1.8 trillion KRW in orders for redevelopment projects, ranking first among domestic construction companies. With the announcement of its mid-term strategic plan this year, declaring a focus on self-developed projects and highly profitable redevelopment projects, it is expected to continue stable order activities based on the proven brand power of Acro and e-Pyeonhansesang.

Researcher Jo Young-hwan of Kiwoom Securities said, "While maximizing profitability through self-developed and redevelopment projects, DL E&C announced a shareholder return policy of 15% of controlling shareholder net income annually from 2021 to 2023 (10% cash dividends, 5% share buybacks) to enhance shareholder value," adding, "Considering this, the current price-to-earnings ratio (PER) of about 5 times is judged to be sufficiently undervalued."

Researcher Lee Dong-heon of Daishin Securities stated, "Orders in 2019 were 7.9 trillion KRW (-16% YoY), but orders recovered to 10 trillion KRW (+28% YoY) in 2020, and the recovery trend starting from the second quarter of this year is expected to continue throughout the year," adding, "Orders scheduled for the second half (housing 6 trillion KRW, civil engineering 1 trillion KRW, plant 2 trillion KRW, etc.) are expected to materialize, which could resolve undervaluation (cash assets 2.2 trillion KRW, borrowings 900 billion KRW, price-to-book ratio (PBR) 0.7 times, indicating undervaluation)."

Researcher Jo Yoon-ho of DB Financial Investment also pointed out, "The relatively small market capitalization compared to operating profit size is ultimately due to concerns about growth potential." New orders in the first half were 3.3 trillion KRW (YoY -0.0%), about 90% of first-half sales. Simply put, securing new orders exceeding sales is necessary to generate growth expectations, so the first-half new order performance is unsatisfactory. This is especially true since DL E&C became a pure construction company after the split. Therefore, attention should be paid to DL E&C's new orders in the second half. Researcher Jo emphasized, "There are 2.5 trillion KRW worth of projects with secured construction rights in housing, and about 1.5 trillion KRW of new orders can be expected overseas, which had previously been outside DL E&C's investment points," adding, "If concerns about growth potential decrease as new orders are secured in the second half, re-rating is possible."

◆Strengthening Developer Business= DL E&C is accelerating its developer business. The developer strategy, actively pursued after the split, is expected to contribute to profitability improvement as it produces results. The developer business reduces the proportion of simple construction contract projects and instead handles the entire process from project discovery, planning, equity investment, financing, construction, to operation. This approach typically yields higher profit margins than general contract construction. The strategy focuses on projects that can secure stable and high profitability and expands investment in future new businesses based on this to build a sustainable growth model.

If the housing construction target for this year is achieved, separate housing division sales are expected to turn around next year. In particular, developer site construction, expected to have high profitability, increased by 99.6% in the first half compared to last year's annual performance, suggesting further profitability improvement effects in the future.

Researcher Ra Jin-sung of KTB Investment & Securities said, "DL E&C plans to expand developer and urban redevelopment projects to broaden its high-profit business portfolio in the housing division," adding, "To this end, it will implement management strategies such as expanding market share in urban redevelopment projects using two brand strategies (ACRO, e-Pyeonhansesang), securing land for large-scale public bidding projects, and leading theme-based commercialization aligned with social, industrial trends, and government policy changes."

Notably, the company is strengthening the developer business by shifting from simple contract-based projects to focusing on securing development profits. It plans to discover projects with proven business performance and stability and expand development profits through equity investments. Currently, it is concentrating on projects that can realize profits in the short term to shorten the investment recovery cycle. Based on past successful experiences such as D-Tower Gwanghwamun and Acro Seoul Forest, the company aims to increase the proportion of high-profit (developer + urban redevelopment) projects, which accounted for 47% last year, to 76% by 2023, raising the operating profit margin to over 20%. As of the first half of 2021, separate developer orders were about 739.6 billion KRW, with an order backlog of approximately 2.2 trillion KRW.

◆'Difficult to Highlight Investment Appeal'… Hydrogen Business as a 'Differentiated Weapon'= Although the solid financial structure raised expectations that the conglomerate discount would be resolved after the split, the undervaluation phase continues. It is difficult to highlight relative investment appeal solely through increased new housing supply and improved performance. This is because these strengths are common across the industry. However, the expansion of the hydrogen business is expected to serve as a differentiated competitive advantage.

DL E&C plans to leverage the recent ESG (Environmental, Social, Governance) strengthening trend as a new business opportunity. To this end, it has entered businesses in hydrogen production, liquefaction, storage EPC and operation, as well as CCUS facility construction. Recently, it received a letter of intent for EPC for a carbon dioxide capture and utilization plant from Daesan Power. Although small in scale, the project will be carried out entirely with DL E&C's own technology, from basic design to performance guarantees.

Additionally, DL E&C signed a 'Carbon Reduction Eco-friendly Building Materials Business Agreement' with Hyundai Oilbank and plans to build a plant producing carbonated products using carbon dioxide mineral carbonation technology. Carbonated products are raw materials used in building materials such as cement and concrete. DL E&C will be responsible for EPC of the plant utilizing desulfurization gypsum carbonation technology owned by Hyundai Oilbank. Design will be completed within this year, with construction starting in the first quarter of next year. Starting with a 100,000-ton annual production plant in 2022, production capacity will be increased to a maximum of 600,000 tons annually, making it the largest carbon dioxide capture and utilization (CCU) facility in Korea. Through this agreement, the company is expected to expand its eco-friendly new business portfolio to include CCU alongside CCS.

Researcher Ra said, "The expansion of the hydrogen business will be a differentiated weapon," adding, "Considering that the power generation sector is the largest emitter of carbon dioxide and that DL E&C has ammonia plant execution capabilities, it is expected to benefit when hydrogen plant orders begin in earnest."