[Click eStock] "Hyundai Construction, Delayed Profit Recovery Timing... Target Price Down"

Target Price Revised Downward by 4.9% Compared to Previous Level

On the 23rd, KB Securities downgraded the target price of Hyundai Engineering & Construction from 41,000 KRW to 39,000 KRW, citing a delay in the timing of profit recovery. The investment rating was maintained at 'Buy.'

Jang Moon-jun, a researcher at KB Securities, explained, "We have lowered the controlling shareholder net profit forecasts for 2024, 2025, and 2026 by 1.3%, 5.6%, and 4.8%, respectively, and adjusted the applied return on equity (ROE) from 5.8% to 5.6%, resulting in a 4.9% downward revision of the target price compared to the previous estimate."

Hyundai Engineering & Construction's Q3 performance this year showed consolidated sales of 8.26 trillion KRW, up 5.1% year-on-year; operating profit fell 53.1% to 114.3 billion KRW; and controlling shareholder net profit dropped 69.5% to 50.5 billion KRW. While the top line met market expectations, profits fell significantly short. Researcher Jang analyzed, "On a separate basis, the domestic cost ratio showed a slight improvement, but the main cause of this quarter's poor performance was the inclusion of an additional 70 billion KRW in costs for the Saudi Arabia Marjan project, which was secured in 2019 and is currently underway. Additionally, the stronger Korean won in Q3 further contributed to the decline in controlling shareholder net profit."

There is an analysis that the timing of a full-scale profit rebound is being delayed. Researcher Jang stated, "The proportion of units sold in 2021-2022, which were most affected by the sharp rise in raw material prices, is high, and one-off costs in overseas operations have not yet ended, so it is necessary to take a conservative view on the timing of profit margin recovery. Profit margin stabilization may begin from the second half of next year."

KB Securities estimates Hyundai Engineering & Construction's full-year performance this year at 33.99 trillion KRW in sales, up 14.6% year-on-year, and operating profit of 643 billion KRW, down 18.1%. For next year, sales are expected to decrease by 10.0% to 30.6 trillion KRW, while operating profit is forecast to increase by 8.6% to 698.5 billion KRW.

Although the profit aspect is disappointing, positive signals are emerging in terms of financial structure. Researcher Jang explained, "Hyundai Engineering & Construction's consolidated net cash, which recorded around 3 trillion KRW from 2020 to 2022, fell to 2.3 trillion KRW at the end of 2023 and to 800 billion KRW in the first half of this year. However, net cash increased to 1.4 trillion KRW this quarter. If further financial structure improvements occur in Q4, confidence in profit improvement after the second half of next year will increase."