[Click eStock] "Hyundai E&C, Growing Earnings Uncertainty... Target Price Lowered"

On October 17, Meritz Securities reported that uncertainty surrounding Hyundai Engineering & Construction's earnings is increasing, and accordingly, the firm lowered its target price from 93,000 won to 76,000 won. The investment opinion was maintained as 'Buy'.

Moon Kyungwon, an analyst at Meritz Securities, stated, "We have revised the target price downward by 18% compared to the previous estimate, mainly due to a drop in the appropriate price-to-book ratio (PBR) following a downward revision of the return on equity (ROE) forecast." He explained, "In the short term, risks include additional overseas cost recognition and the level of penalties for Hyundai Engineering, but from a long-term perspective, the impact of the nuclear power plant business on corporate value is greater."

Hyundai Engineering & Construction's third-quarter earnings this year are expected to fall short of market expectations. Analyst Moon said, "Third-quarter consolidated operating profit is projected to decrease by 59.9% year-on-year to 45.8 billion won, falling below the consensus (the average of securities firms' forecasts) of 203.4 billion won." He added, "At Hyundai Engineering's petrochemical plant site in Poland, a bond call (demand for performance guarantee) of 170 billion won was made, leading to higher selling and administrative expenses. Additionally, as in the fourth quarter of last year, there were extra costs due to construction period extensions at Middle Eastern plant sites. The gross profit margin (GPM) for the construction business is also expected to decline compared to the previous quarter due to increased cost ratios at some domestic sites upon completion."

With growing earnings uncertainty, fourth-quarter results are also expected to be weaker than anticipated. Analyst Moon noted, "It is expected that Hyundai Engineering will recognize costs related to a bond call demanded by a Malaysian power plant site, and there is also a possibility of additional costs being incurred at other overseas sites currently under construction."

However, expectations for the nuclear power business are rising. Analyst Moon explained, "Nuclear power orders are expected to show significant results starting in the first quarter of next year. The Kozloduy nuclear power plant in Bulgaria is anticipated to sign an EPC (engineering, procurement, and construction) contract in the first quarter of next year, and although there is some scheduling uncertainty, a FEED (front-end engineering design) contract for a large-scale nuclear power project in the United States is also expected in the first quarter of next year. An order for the Palisades small modular reactor (SMR) project in the United States is also anticipated within the fourth quarter of this year."