Meritz Securities said on the 17th that Hyundai E&C is highly likely to post results in the fourth quarter that are weaker than expected, following the third quarter this year. It lowered the target price by 18%, from 93,000 won to 76,000 won, while maintaining a "buy" investment opinion. Hyundai E&C's closing price in the previous trading day was 61,200 won.
Meritz Securities projected that Hyundai E&C's operating profit on a consolidation basis in the third quarter this year would come in at 45.8 billion won, down 59.9% from a year earlier, missing the market consensus (203.4 billion won).
Hyundai Engineering was asked for a 170 billion won bond call (claim for performance bond) at a petrochemical plant site in Poland, significantly pushing up SG&A. As in the fourth quarter of last year, additional expense recognition due to schedule extensions occurred at plant sites in the Middle East. Upon completion at some domestic sites, a rise in cost ratios is also expected to pull down the construction gross profit margin (GPM) compared with the previous quarter.
Orders and housing starts have achieved 82% and 89% of their annual targets, respectively. However, Meritz Securities noted that earnings uncertainty is growing. Moon Kyung-won, an analyst at Meritz Securities, said, "Hyundai Engineering is expected to recognize hundreds of billions of won in expenses related to the bond call requested by the Malaysia power plant site, and the possibility cannot be ruled out that additional expenses will be reflected at other overseas sites under construction."
However, nuclear power orders are estimated to show results starting in the first quarter next year. Moon said, "The Kozloduy nuclear power plant in Bulgaria is expected to sign an engineering, procurement and construction (EPC) contract in the first quarter next year, and although there is schedule uncertainty, a front-end engineering design (FEED) contract for a large U.S. nuclear power project can be expected starting in the first quarter next year." Orders for initial construction of the Palisades small modular reactor (SMR) in the United States are also forecast within the fourth quarter this year.
Moon said, "We lowered the target price as the appropriate PBR fell," adding, "In the short term, additional overseas cost recognition and the level of penalties for Hyundai Engineering could be risks."
He added, "From a long-term perspective, the impact of the nuclear power business on corporate value is greater."