Operating profit at Hyundai E&C, one of Korea's largest builders (No. 2 in construction capability evaluation), is expected to shrink to the 70 billion won range in the third quarter (July–September), raising the prospect of an earnings shock. This is because subsidiary Hyundai Engineering is expected to post a loss of nearly 200 billion won on its overseas business. Hyundai E&C last year also logged more than 1.2 trillion won in operating losses due to overseas business losses at subsidiary Hyundai Engineering. Hyundai E&C will release third-quarter results on the 31st.
According to FnGuide and Mirae Asset Securities on the 24th, the average estimate (consensus) for Hyundai E&C's third-quarter operating profit compiled by major brokerages over the past month came to 74.5 billion won. Compared with 114.291 billion won in operating profit in the third quarter a year earlier, that is a decrease of 34.8% (39.791 billion won). It is also down 65.6% (142.501 billion won) from the second quarter of this year, when operating profit exceeded 200 billion won.
Hyundai E&C posted operating profit in the black from the first to third quarters last year. However, when it disclosed full-year results early this year, it shocked the market by announcing a loss of 1.26342 trillion won. The cause of the large loss at the time was a "big bath" — recognizing all the losses at once — stemming from weak overseas business at subsidiary Hyundai Engineering.
Hyundai E&C also booked more than 200 billion won in operating profit per quarter this year in the first quarter (213.697 billion won) and the second quarter (217.001 billion won). Cumulatively for the first half, operating profit was 430.698 billion won. But in the third quarter, Hyundai Engineering's overseas business again became a drag.
The industry expects the cause of the third-quarter earnings deterioration to be Hyundai Engineering's "bond call." A bond call is when the client confiscates the performance bond on grounds that the contractor failed to properly perform under the contract. Hyundai Engineering faced bond call requests at a general-purpose plastics production plant under construction in Poland and at a power generation plant site in Malaysia. In August, a bond call was requested at the Poland site and the performance bond was paid, while for the Malaysia site, a provisional injunction to stay execution of the bond payment was granted by a local court, so it has not yet been paid.
The size of the bond call payment was not disclosed. However, the industry estimates the Poland bond call to be reflected in third-quarter results at about 170 billion won. A construction industry official said, "What will have the biggest impact on Hyundai E&C's results this time is Hyundai Engineering's bond call." The Malaysia bond call, which could be reflected in fourth-quarter results, is estimated at 40 billion to 50 billion won.
Some securities firms also expect longer construction deadlines at Hyundai E&C's Middle East overseas business sites to weigh on results. Kim Gi-ryong, an analyst at Mirae Asset Securities, said that extended deadlines and increased construction costs at gas and oil processing facilities being built in Saudi Arabia's Marjan, among others, would affect earnings.
The Marjan project, awarded by state-run oil company Aramco, is part of the "Marjan project" to process gas and crude oil produced from the offshore oil field in the Marjan area, about 250 kilometers northwest of Dammam in eastern Saudi Arabia. The order amount is $2.7 billion (about 3.87 trillion won). It won Package 6 and Package 12 simultaneously.
Package 6 is construction to add facilities capable of processing an additional 300,000 barrels per day of crude oil and gas to an existing plant that separates and processes crude oil and gas. Package 12 is construction to supply power, water, and other infrastructure needed to operate the plant at an onshore gas processing plant. Package 6 was to be completed by Nov. 2024, and Package 12 by Dec. 2024, but construction is still underway. A Hyundai E&C official said, "We plan to complete Package 6 within this year, and for Package 12 we are discussing the completion timing with the client."
Meanwhile, major builders are expected to hold up relatively well, with third-quarter operating profits around 100 billion won. Daewoo E&C's third-quarter operating profit consensus is 99.9 billion won, estimated to be up 60.3% (37.6 billion won) from the third quarter last year. DL E&C is projected at 117.6 billion won for the third quarter, up 41.1% (34.3 billion won) from a year earlier. GS Engineering and Construction is also expected to post 100.6 billion won in operating profit, up 22.9% (18.8 billion won) from the same period last year.