POSCO[005490/BUY] : 2H20 ASP Hike Increasingly Justified
Long/Short Equity, Deep Value, Growth At A Reasonable Price, Korea
Seeking Alpha Analyst Since 2015
HYUNDAI MOTOR SECURITIES Co., Ltd. is the investment banking arm of the Hyundai Motor Group. It is a Korea-based company specialized in the provision of securities and financial services. The Company mainly engages in the securities dealing and brokerage businesses, covering stocks, futures, options, government bonds, corporate bonds, foreign exchanges and financial derivative products. It also engages in the provision of investment consulting services, Internet banking services, corporate financing services, corporate analysis services, as well as operation of trust business.
Summary
- We expect POSCO to report an operating loss of KRW13.6bn on a non-consolidated basis and profit of KRW188bn on a consolidated basis for 2Q20.
- Our forecasts are lower than the consensus estimates of KRW162bn (non-consolidated) and KRW321bn (consolidated).
- We forecast shares to move northwards as global steel demand is expected to recover in 2H20 vs. 1H.
Investment highlights- We expect POSCO to report an operating loss of KRW13.6bn on a non-consolidated basis and profit of KRW188bn on a consolidated basis for 2Q20. Our forecasts are lower than the consensus estimates of KRW162bn (non-consolidated) and KRW321bn (consolidated). - Notwithstanding the weaker-than-expected results, we maintain BUY as: 1) the reopening of factories in downstream industries will likely lead to the recovery of production and sales from 3Q20; 2) steel prices are on the rise in major markets such as China, Japan and the US; and 3) the stock is trading at 0.35x P/B, below its historical low. We keep our target price unchanged at KRW240,000.Major issues and earnings outlook- For 2Q20 we expect to see sales of KRW5.89tn, an operating loss of KRW13.6bn, and net profit of KRW97.1bn on a non-consolidated basis. Of note, POSCO has not reported an operating loss since 2000 when it began announcing quarterly results and the lowest operating profit it reported was KRW170.4bn in 3Q09.- We believe 2Q20 results will miss expectations because of reduced exports of value-added products amid anemic overseas demand, a decline of ASP on an unfavorable product mix (e.g., increased sales portion of HR), and an increase in fixed cost per ton due to production declines. Our analysis based on the Korea Iron & Steel Association’s data reveals that Korea’s monthly average CR exports fell 23% YoY in April-May and 27% vs. 1Q20. Domestic HR sales also retreated 11% YoY and 9% vs. 1Q20 but the pace of decline was milder compared with CR sales, and domestic sales were relatively better because of tight supply. The sharp decline in CR sales worked to increase the portion of HR in overall sales, which should lead to a steeper-than-expected ASP decline. - We see sales and production improving QoQ in 3Q20 as downstream industries reopen, evidenced by global automakers’ higher utilizations. POSCO’s third blast furnace in Gwangyang is slated to resume operation in early July. However, sharply rising iron ore spot prices since June (USD84/ton in January-May vs. USD100/ton at present) call for an increase in ASP in 3Q20. With Chinese dealer steel prices climbing and steelmakers in China, Japan and the US moving to raise domestic prices in for June and July, we believe POSCO’s possible attempt to raise its ASP is fully justified.Share price outlook and valuation- The stock has come down sharply from the level seen at the beginning of the year, to now trade at the historically low P/E. We believe 2Q20 earnings deterioration is fully priced in.- We forecast shares to move northwards as global steel demand is expected to recover in 2H20 vs. 1H and POSCO’s earnings are likely to improve, albeit moderately. We also find the steelmaker’s continued efforts to boost shareholder value, underscored by its share buybacks, positive.
Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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