This article was published on Dec. 15, 2024, at 7:10 a.m. on the Chosun Biz Money Move (MM) site.
DN Solutions, a machinery and equipment company aiming for a market capitalization of 5 trillion to 6 trillion won through a listing on the Korea Stock Exchange, has decided to assess its corporate value using the price-earnings ratio (PER) method. Given the high capital expense nature of the machinery and equipment industry, there was speculation that the earnings before interest, taxes, depreciation, and amortization (EBITDA) method would be chosen, but the company determined that the PER method based on net profit would be more advantageous.
The comparable companies are expected to primarily include Japanese machinery and equipment firms. While the Korea Exchange holds a somewhat negative view on including foreign companies as comparables, industry insiders have noted that there are no suitable domestic comparables for DN Solutions. However, considering DN Solutions' projected performance this year and the PER levels of foreign comparable companies, it is estimated that its corporate value would only reach around 4 trillion to 5 trillion won. There is also significant concern that market liquidity will decrease amid the presidential impeachment situation, so how to align the target market capitalization will be crucial.
According to investment banking (IB) industry sources on the 15th, DN Solutions passed the preliminary review for its listing on the Korea Stock Exchange on the 11th and has begun drafting its securities registration statement. The lead underwriters are Mirae Asset Securities, Samsung Securities, and UBS Securities.
DN Solutions plans to determine its market capitalization using the PER method rather than the enterprise value/EBITDA (EV/EBITDA) method. Typically, machinery and equipment companies prefer the EV/EBITDA method due to high capital investment expenses and significant depreciation costs, but DN Solutions has opted for the PER method, which highlights stable profitability and net income. An official in charge of initial public offerings (IPO) at a securities firm noted, "I understand that DN Solutions has good profitability and its capital expenditures (CAPEX) are not that large compared to other equipment industries," adding that "while EV/EBITDA could be used as a supplementary method, the main focus is on the PER method."
There now appears to be a situation where comparables must be found overseas. While Hyundai Wia was somewhat comparable domestically, the proportion of machinery and equipment sales is only 10% of its total sales, and it is currently pursuing the sale of its machinery and equipment business, which makes it inappropriate as a comparable company according to underwriters. Other listed companies such as SNT Dynamics, SIMPAC, and Smac, which decided to acquire Hyundai Wia's machinery and equipment business, as well as Hwacheon Machine, only have market capitalizations in the hundreds of billions to a few trillion won. Comparing these to DN Solutions, which targets a corporate value of 5 trillion to 6 trillion won, is realistically impossible.
The industry believes that Japanese and European machinery and equipment companies will become benchmarks for DN Solutions. Particularly among Japanese machinery and equipment firms, many are publicly listed, and their trailing PER (calculated based on the net profit of the last four quarters) generally stands at around 13 to 15 times.
Currently, notable publicly listed Japanese machinery and equipment companies at the top level in the global market include Amada Machine Tools (PER 13.7 times), Okuma Corporation (14.1 times), Fanuc (26.1 times), Komatsu (10.3 times), Makino (12.4 times), DMG Mori (13.4 times), and JTEKT (16.6 times). Yamazaki Mazak is a non-listed company, as are the German companies Trumpf and Schuler, and the U.S. company Haas Automation.
DN Solutions is expected to apply the PER of these companies to its own valuation. The net profit projected for DN Solutions this year is around 315 billion won, and if a PER of 13 times is applied, it would amount to 4 trillion won; if a PER of 15 times is applied, it would be around 470 billion won. To hit the target of 5 trillion to 6 trillion won, there is an expectation for significant increases in the stock prices of these companies next year.
Meanwhile, the success of DN Solutions' public offering will also rely on how it determines the proportion of existing share sales. Currently, it is reported that the company and underwriters are considering setting the existing share sale proportion at around half. Equity stakes from financial investors (FIs) such as the Korea Development Bank and Stick Investment are expected to be sold in the existing share sale. DN Solutions was formerly Doosan Machine Tools. During the restructuring of the Doosan Group, the private equity fund MBK Partners acquired Doosan Machine Tools, which was then sold to DN Group in 2021. DN Group was able to achieve a successful acquisition with the support of financial investors.