[Click eStock] "Daewoo Construction, Target Price Lowered by 10%"

LS Securities lowered the target price of Daewoo E&C to 4,500 KRW on the 31st.

The company recorded an earnings shock due to one-time expenses reflected in the housing and civil engineering sectors. Daewoo E&C's Q3 revenue was 2.5478 trillion KRW, down 14.8% year-on-year, relatively in line with consensus. However, operating profit was 62.3 billion KRW, down 67.2% year-on-year, marking an earnings shock that fell 47.1% short of the consensus operating profit of 117.8 billion KRW.

The main cause of the poor performance was the one-time cost of 27 billion KRW related to additional finishing work for re-construction at a specific site in the housing sector. Additionally, a one-time cost of 55 billion KRW was reflected due to increased costs at domestic and overseas sites, including the Singapore site, in the civil engineering sector. Excluding these one-time costs, the recurring gross profit margin was about 6.9% for the housing sector and 8.3% for civil engineering.

However, it is viewed positively that despite 8,700 housing units being occupied this quarter, there was no write-off of accounts receivable due to unsold units similar to Q2 in the housing sector, which had been a concern. Although about 10,000 housing units are scheduled to be occupied in Q4, leaving some earnings volatility, gradual profit improvement is expected as the mix of new construction volume and sites improves toward the second half of next year.

Following the downward revision of Daewoo E&C's earnings estimates and the applied multiple adjustment, the target price was lowered by 10% from 5,000 KRW to 4,500 KRW, maintaining a buy rating. Se-ryeon Kim, a researcher at LS Securities, said, "Two prerequisites are necessary for Daewoo E&C's stock price momentum." The first is overseas order achievements, including the Turkmenistan mineral fertilizer project worth 900 billion KRW, the Libya sewage treatment plant reconstruction project, the Iraq Al Faw naval base project worth 1.8 trillion KRW, and nuclear power plants in the Czech Republic and Poland. The second is confirmation of the downside rigidity of margins in the housing sector. It is true that the slope of earnings recovery compared to peer groups has somewhat decreased at this point due to delays in overseas orders and quarterly one-time costs. However, there is room for upward revision of earnings estimates based on overseas order achievements and confirmation of downside rigidity in housing margins.