POSCO: Recovery Slower Than Desired But Valuation Attractive
Summary
- Recent economic stimulus measures proposed by China and other countries may spur demand once the coronavirus contagion begins to wane.
- Raw material price declines since 1Q20 on the increased global supply of iron ore bode well for earnings.
- Attractive valuation, with the stock trading close to its historical low valuation of 0.36x P/B.
Investment highlights
We now believe Posco's (NYSE:PKX) 1Q20 parent operating profit will come to KRW350.1bn (down from our previous estimate of KRW374.6bn). Our forecast is 21% below the consensus estimate of KRW443.8bn. We maintain BUY for the following reasons: 1) the recent economic stimulus measures proposed by China and other countries may spur demand once the coronavirus contagion begins to wane; 2) raw material price declines since 1Q20 on the increased global supply of iron ore bode well for earnings; and 3) an attractive valuation, with the stock trading close to its historical low valuation of 0.36x P/B.
Major issues and earnings outlook
We now estimate 1Q20 parent sales at KRW7.10tn, operating profit at KRW350.1bn, and pretax profit at KRW444.3bn. Operating profit should be down 58% YoY and 5% QoQ. On a consolidated basis, operating profit should be down 49% YoY but up 10% QoQ at KRW612.5bn.
While the operating profit weakness seen in 4Q19 will likely continue into 1Q20, it should still be better than the market’s expectations. Although sales volume fell QoQ due to the maintenance/repair at the Gwangyang steel mill, ASP should rise slightly. Currently, the domestic HR price has increased by KRW10,000/ton and the January HR export price has grown by USD20 per ton. The recent depreciation of the KRW is also advantageous for the steelmaker.
That said, we expect to see only a moderate increase in earnings in 2Q20 given the weakness in the price of Chinese HR entering February, a leading indicator of POSCO’s ASP. However, we believe there will be a meaningful improvement in earnings in 2H20 as China is picking up efforts to stimulate its economy.
Share price outlook and valuation
Coronavirus fears have pushed the stock down to its historical low P/B. The previously unexpected economic stimulus packages proposed by China and other countries the world over mean POSCO will become a major beneficiary once the COVID-19 situation cools
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