[Click eStock] DL E&C, Q1 Earnings 'Decline' and Cost 'Burden'

[Asia Economy Reporter Junho Hwang] Korea Investment & Securities has lowered the target price of DL E&C to 90,000 KRW. This adjustment is due to the decline in first-quarter earnings this year and the increased cost ratio in DL Construction's building division.

DL E&C's consolidated sales for the first quarter of this year amounted to 1.5147 trillion KRW, down 10.9% compared to the same period last year. Operating profit recorded 125.7 billion KRW, a 37.1% decrease over the same period. These figures are 12.9% and 28.4% below market expectations, respectively.

Korea Investment & Securities cited sluggish housing sales as the reason for the downward revision of earnings. It appears that site operations were not smoothly conducted before and after the enforcement of the Serious Accident Punishment Act, and due to setbacks in monetizing the Russia project, plant sales on a separate basis fell 53% compared to the same period last year. Furthermore, after the completion of urban redevelopment sites last year, a temporary gap occurred in housing sales, resulting in a 20% decrease in sales of DL Construction, a consolidated subsidiary, compared to the same period last year.

In particular, the cost ratio in the housing division rose by 3.2 percentage points year-on-year (on a separate basis). It seems that the planned site costs were adjusted upward to reflect the increase in raw material prices. However, the increase in the cost ratio was not significantly different from the range presented in the company's management plan at the beginning of the year.

The problem is that the cost ratio in DL Construction's building division increased by more than 12 percentage points. The deterioration in the sales mix of the building division in the first quarter of this year compared to last year had a significant impact. Most of the urban redevelopment sites started between 2018 and 2019 were completed by last year, but the start of construction for sites ordered last year was delayed as a result.

Accordingly, Kyungtae Kang, a researcher at Korea Investment & Securities, stated, "Reflecting the preliminary results of the first quarter this year and changes in the estimated GPM by division from the second quarter onward, the target price was lowered by 10% based on the first-quarter results."