[Click eStock] GS Construction, Structural Improvement Through Housing Sales Recovery and New Businesses

[Asia Economy Reporter Lee Seon-ae] Korea Investment & Securities announced on the 12th that it maintains a Buy rating and a target price of 55,000 KRW (12-month forward price-to-book ratio (PBR) of 1.0x) for GS Construction. Housing sales, which are expected to clearly rebound starting from the third quarter, will drive the scale and profitability of GS Construction, which is currently in a transitional phase. The signing of the main contract for the North East Link project in Australia, for which GS Construction was selected as the preferred bidder, and the recognition of remaining orders for the Oman water treatment plant are scheduled, raising expectations for large-scale construction orders in the fourth quarter. The global water solutions IPO planned for the second half of next year is a key issue to closely monitor in the new business segment.

GS Construction's third-quarter sales are expected to be 2.3586 trillion KRW, and operating profit 226.3 billion KRW, which are 5.6% and 4.2% below consensus, respectively. By segment, housing sales (+19.1% YoY) are expected to rebound for the first time in three quarters. This is because it is the time when cost inputs increase at housing construction sites that supplied 27,000 units in 2020. Civil engineering (-12.9% YoY) and plant (-39.5% YoY) sales are expected to continue to decline in the third quarter due to the absence of existing large sites and a gap in new orders. The selling and administrative expense ratio to sales is estimated to fall by 4.9 percentage points from the second quarter to 6.9%. This is because large one-off events that occurred in the second quarter, such as reductions in regular plant division staff and bond calls from overseas completed project clients, are not expected to recur.

2021 is a transitional year for structural improvement. The current decline in GS Construction's scale is reasonably viewed as a process of reducing body fat and increasing muscle mass. The expected order backlog for the plant division in the third quarter is about 1.6 trillion KRW. This is more than a 60% decrease compared to the fourth quarter of 2019, when the global water solutions (GS Inima) order backlog began to be classified as a new business. However, the plant order backlog, which is going through a difficult period, is being replenished by orders from modular and water treatment new business subsidiaries.

Researcher Kang Kyung-tae of Korea Investment & Securities emphasized, "GS Construction has also expanded its lineup of new subsidiaries such as battery recycling (Enerma) and data center leasing (Givesco)," adding, "When these subsidiaries begin generating sales, they are expected to contribute higher profit margins than traditional construction projects."