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Doosan Heavy I&C ( KS)

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February 5, 213 Company Report (342 KS) Machinery Construction business needs to get back on track 4Q review: Revenues of W2.9tr (+4.1% YoY), OP of W168.6bn (+9.2% YoY) (DHIC) posted 4Q revenues of W2.9tr
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February 5, 213 Company Report (342 KS) Machinery Construction business needs to get back on track 4Q review: Revenues of W2.9tr (+4.1% YoY), OP of W168.6bn (+9.2% YoY) (DHIC) posted 4Q revenues of W2.9tr (+4.1% YoY), an operating profit of W168.6bn (+9.2% YoY), and a net loss of W219.1bn (turning to loss YoY), missing both our estimates and the market consensus. 4Q OP margin edged up.3%p YoY and.7%p QoQ to 5.8%. Revenues were not far off our projections, but margins were still disappointing in what is normally considered a strong season. We attribute overall weakness in margins to: 1) slower-than-expected revenue growth (9.1%) at the firmês largest business (power generation), and 2) the global economic slowdown, which caused top-line contraction at the construction and Doosan Power Systems (DPS) units, as well as the more profitable casting & forging unit. Non-operating profit was hit by Doosan E&CÊs substantial provisioning, which led to equity-method losses of W382.7bn. Net financing costs stood at W39.2bn, while the strengthening of the won resulted in F/X gains of W2.6bn. It all comes down to construction announced it will inject net cash of W55.5bn and transfer its heat recovery system generator (HRSG) business (estimated at W371.6bn, including W7bn in other assets) to Doosan E&C. DHIC will receive shares of Doosan E&C, essentially putting DHICÊs stake in Doosan E&C at over 8%. We see these extraordinary measures as painful but necessary actions to remove uncertainties over Doosan E&C, which have persistently held back DHICÊs share performance. We expect the capital injection will put to rest one of the largest downside risks to the stock, but other than that we see no notable change regarding DHIC. The only difference would be accounting adjustments; overall operations and organization remain intact. We thus believe valuations for DHIC should (for the most part) remain unchanged. In the end, we believe DHICÊs share performance will come down to whether Doosan E&CÊs major businesses can get back on their feet. We do not expect uncertainties over Doosan E&C to resurface for a while, but we will monitor operating trends in construction more closely than before. Maintain Buy, but Lower TP to W6, We maintain our Buy call on DHIC, but trim our target price by 7.7% to W6,. We have adjusted down our 213 earnings and asset-value projections in light of last yearês weak orders and the recent HRSG asset swap. Our valuation is based on the sum of the operating value of DHICÊs legacy businesses and its ownership stakes in subsidiaries (Doosan E&C, Doosan Infracore, and Doosan Engine) as percentages of their market caps. We expect the financial support to Doosan E&C will boost DHICÊs operating earnings and enterprise value; thus, we see upside risks to the companyês stock going forward.. Daewoo Securities Co., Ltd. Ki-jong Sung Ryan Kang Buy (Maintain) Target Price (12M, W) 6, Share Price (2/4/13, W) 42,85 Expected Return (%) 4. EPS Growth (13F, %) 1,37.8 Market EPS Growth (13F, %) 18.1 P/E (13F, x) 9.9 Market P/E (13F, x) 9.3 KOSPI 1, Market Cap (Wbn) 4,536 Shares Outstanding (mn) 16 Avg Trading Volume (6D, ') 51 Avg Trading Value (6D, Wbn) 22 Dividend Yield (13F, %) 1.8 Free Float (%) Week Low (W) 39,9 52-Week High (W) 78,3 Beta (12M, Daily Rate of Return).91 Price Return Volatility (12M Daily, %, SD) 2. Foreign Ownership (%) 13.5 Major Shareholder(s) Doosan et al. (41.27%) Treasury shares (15.88%) Price Performance (%) 1M 6M 12M Absolute Relative Earnings & Valuation Metrics FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 12/1 7, ,252 11, , /11 8, , /12P 9, /13F 9, , /14F 9, , Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, estimates Share price KOSPI 1/12 5/12 9/12 1/13 Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. February 5, revenues and OP to come in at W9.5tr and W593.3bn For 213, DHIC is expected to record revenues of W9.5tr (- 1.4% YoY), operating profit of W593.3bn (-.3% YoY), and net profit of W442.3bn. The company is unlikely to show revenue growth in 213, as it: 1) won new orders of only W5.8tr in 212 (vs. annual target of W1.8tr), and 2) plans to transfer its HRSG business to Doosan E&C. However, operating profit will likely fall only modestly in light of order backlogs of W18.7tr (which will take two years to deliver). The growth of DHICÊs power business should slow in 213, while its industrial business unit is projected to show an earnings recovery thanks to a sharp increase in new orders last year. Earnings at the casting & forging business unit, which used to display high margins, is projected to deteriorate on weak orders. The DPS unit is likely to exhibit earnings improvement thanks to higher orders, but only to a modest degree on intensified competition. We revised down our earnings forecasts for DHIC to reflect: 1) sluggish orders in 212, 2) the transfer of the HRSG business, and 3) the cash injection into Doosan E&C. Table 1. 4Q12 earnings review (Wbn, %) 4Q11 3Q12 4Q12P Growth Actual KDB Daewoo Consensus YoY QoQ Revenues 2,787 2,196 2,92 3,24 3, Operating profit OP margin Pretax profit TTR TTR Net profit TTR TTR Note: Figures are based on consolidated K-IFRS Source: Company data, FnGuide, estimates Table 2. Earnings forecast revisions (Wbn, W, %) Previous Revised % change 212P 213F 214F 212P 213F 214F 212P 213F 214F Comments Revenues 9,749 9,586 1,65 9,627 9,492 9, Reflects 4Q12 earnings, HRSG business -1. transfer, and cash injection Operating profit Pretax profit TTR Net profit EPS (W) 3,64 4,543 5, ,347 4,649 OP margin Net margin Source: Company data, Table 3. Quarterly earnings forecasts (Wbn, W, %) F 4Q12P growth 1Q 2Q 3Q 4QP 1QF 2QF 3QF 4QF QoQ YoY P 213F Revenues 2,72 2,456 2,196 2,93 2,51 2,383 2,25 2, ,496 9,627 9,492 Operating profit Pretax profit TTR TTR Net profit TTR TTR OP margin Net margin Note: Figures are based on consolidated K-IFRS / Source: Company data, 2 February 5, 213 Table 4. Earnings breakdown by business unit (Wbn, %) F Annual 1Q 2Q 3Q 4QP 1QF 2QF 3QF 4QF 212P 213F Revenues 2,72 2,456 2,196 2,93 2,51 2,383 2,25 2,853 9,627 9,492 Power 1,215 1,442 1,299 1,692 1,188 1,389 1,261 1,664 5,647 5,51 Industrial ,81 1,233 Casting & forging Construction DPS, etc ,77 1,761 Operating profit Power ,856 Industrial Casting & forging Construction DPS, etc Revenue growth Power Industrial Casting & forging Construction DPS, etc OP margin Power Industrial Casting & forging Construction DPS, etc Notes: Doosan E&CÊs earnings are not included in 1Q11 figures; however, they are included in 211 data Source: Company data, Table 5. Valuation (Wbn, x) Operating value 213F EBITDA 796 EV/EBITDA 8.6 EV 6,846 Fair value - 1 6,846 Value of subsidiaries Doosan Infracore Market cap 2,6 Fair value - 2 Value of 44.8% stake 1,165 Doosan Engine Revenues 118 Fair value - 3 Market cap 53 Value of 42.7% stake 226 Doosan E&C Market cap 56 Fair value - 4 Value of 72.8% stake 48 Others -5 3 Net debt - 6 3,35 Interest bearing debt 3,8 Cashable assets (Total cash) 45 Treasury stock value 714 Total enterprise value ,38 Shares outstanding 1,477 Fair price (Won) 6,21 Source: Company data, 3 February 5, 213 Valuation comparison We compared DHICÊs valuations with those of its peers. Most of the companyês competitors are overvalued against the market. Table 6. Valuation comparison ROE (%) P/E (x) P/B (x) EV/EBITDA (x) 12 13F 12 13F 12 13F 12 13F DHIC Mitsubishi Heavy Toshiba Siemens GE IHI Areva Avg Source: Bloomberg, Figure 1. P/E-ROE of DHIC vs. global peers (213F) (P/E, x) 25 Figure 2. P/B-ROE of DHIC vs. global peers (213F) (P/B, x) 2. Mitsubishi GE 2 15 Areva IHI Mitsubishi IHI DHIC Siemens 1 DHIC Toshiba GE Siemens.5 Areva Toshiba 5 (ROE, %). (ROE, % ) Source: Bloomberg, Source: Bloomberg, Figure 3. P/E band Figure 4. P/B band (Market cap,wbn) 2, 4.x (Market cap,wbn) 2, 4.3x 15, 15, 2.3x 1, 2.x 1, 15.x 1.3x 5, 1.x 5,.8x 5.x.3x F F Source: Source: 4 February 5, 213 Figure 5. Annual earnings trends Figure 6.. Annual earnings breakdown by business unit (Wbn) (%) (%) Power Industrial Casting/forging Construction DPS, etc. 25, Revenues (L) 1 1 OP margin (R) 2, , 6 6 1, 4 4 5, P 13F P 13F Source: Company data, Source Company data, Figure 7. Quarterly earnings trends Figure 8. Quarterly earnings breakdown by business unit (Wbn) (%) (%) Power Industrial Casting/forging Construction DPS, etc. 3,5 Revenues (L) 1 1 OP margin (R) 2, ,1 6 1, Q11 3Q11 1Q12 3Q12 1Q13F 3Q13F 1Q11 3Q11 1Q12 3Q12 1Q13F 3Q13F Source: Company data, Source: Company data, Figure 9. DHICÊs 213 new order target Figure 1. New order trends (Wbn) 14, (Wbn) 16, Power Industrial Casting/forging Construction DPS, etc. 12, Backup 1, 1,81 5,147 12, 8, 1,3 6, 4, 1,43 1,264 3,475 Backup 7,943 8, 2, 2,581 4, 13년 213 계획 On-hand DPS; Equipment EPC new order target casting/forging Backup projects Source: Source: 5 February 5, 213 (342 KS/Buy/TP: W6,) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12P 12/13F 12/14F (Wbn) 12/11 12/12P 12/13F 12/14F Revenues 8,496 9,627 9,492 9,967 Current Assets 5,264 7,134 6,831 6,679 Cost of Sales 7,251 8,214 8,16 8,52 Cash and Cash Equivalents 783 1,891 1,78 1,512 Gross Profit 1,245 1,413 1,386 1,465 AR & Other Receivables 2,837 3,389 3,246 3,39 SG&A Expenses Inventories Operating Profit (Adj) Other Current Assets Operating Profit Non-Current Assets 8,326 8,381 8,556 8,764 Non-Operating Profit Investments in Associates 3,826 3,898 4,18 4,158 Net Financial Income Property, Plant and Equipment 2,69 2,725 2,725 2,733 Net Gain from Inv in Associates Intangible Assets 1,158 1,199 1,257 1,39 Pretax Profit Total Assets 13,589 15,515 15,387 15,443 Income Tax Current Liabilities 6,76 7,43 6,529 6,467 Profit from Continuing Operations AP & Other Payables 3,151 3,466 3,36 3,469 Profit from Discontinued Operations -48 Short-Term Financial Liabilities 2,345 2,966 2,566 2,366 Net Profit Other Current Liabilities Controlling Interests Non-Current Liabilities 2,716 3,824 3,935 3,812 Non-Controlling Interests Long-Term Financial Liabilities 1,797 2,151 2,151 1,851 Total Comprehensive Profit Other Non-Current Liabilities 662 1,356 1,47 1,524 Controlling Interests Total Liabilities 8,792 1,868 1,464 1,28 Non-Controlling Interests Controlling Interests 4,771 4,637 4,929 5,185 EBITDA Capital Stock FCF (Free Cash Flow) Capital Surplus EBITDA Margin (%) Retained Earnings 3,553 3,522 3,915 4,273 Operating Profit Margin (%) Non-Controlling Interests Net Profit Margin (%) Stockholders' Equity 4,797 4,647 4,923 5,164 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12P 12/13F 12/14F 12/11 12/12P 12/13F 12/14F Cash Flows from Op Activities P/E (x) Net Profit P/CF (x) Non-Cash Income and Expense P/B (x) Depreciation EV/EBITDA (x) Amortization EPS (W) 2, ,347 4,649 Others CFPS (W) 4,291 2,198 6,257 6,532 Chg in Working Capital BPS (W) 36,93 34,444 36,647 38,577 Chg in AR & Other Receivables DPS (W) Chg in Inventories Payout ratio (%) Chg in AP & Other Payables Dividend Yield (%) Income Tax Paid Revenue Growth (%) Cash Flows from Inv Activities -1, EBITDA Growth (%) Chg in PP&E Operating Profit Growth (%) Chg in Intangible Assets EPS Growth (%) , Chg in Financial Assets Accounts Receivable Turnover (x) Others Inventory Turnover (x) Cash Flows from Fin Activities Accounts Payable Turnover (x) Chg in Financial Liabilities ROA (%) Chg in Equity -49 ROE (%) Dividends Paid ROIC (%) Others Liability to Equity Ratio (%) Increase (Decrease) in Cash , Current Ratio (%) Beginning Balance 1, ,891 1,78 Net Debt to Equity Ratio (%) Ending Balance 783 1,891 1,78 1,512 Interest Coverage Ratio (x) Source: Company data, estimates 6 February 5, 213 Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. Stock Ratings Industry Ratings Buy Relative performance of 2% or greater Trading Buy Relative performance of 1% or greater, but with volatility Hold Relative performance of -1% and 1% Sell Relative performance of -1% Overweight Fundamentals are favorable or improving Neutral Fundamentals are steady without any material changes Underweight Fundamentals are unfavorable or worsening (W) 12, 1, 8, 6, 4, 2, 2/11 8/11 2/12 7/12 1/13 * Ratings and Target Price History (Share price (----), Target price (----), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analystês estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the AnalystÊs area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. ( Daewoo ), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. 7 February 5, 213 Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2 (Financial Promotion) Order 25 (the Order ), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as Relevant Persons ). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been revie
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