"Big Gains for Holders... Up 566% and Still More to Go" Target Price Raised, But Here’s Why Caution Remains [Weekend Money]

Daewoo Engineering & Construction Surges 669% in Six Months
Valuation Pressure Mounts Amid Overseas Nuclear Power Hopes

A securities company has significantly raised its target price and maintained a 'Buy' investment rating. However, the word 'burden' appears in the title of the report. This is about Daewoo Engineering & Construction, whose value has surged on expectations of overseas nuclear power plant orders.

Hyundai Motor Securities recently raised its target price for Daewoo Engineering & Construction from 7,400 won to 32,000 won. Compared to the closing price of 25,450 won on May 28, the potential upside is 25.7%. The company believes there is room for further increase, reflecting the possibility of securing nuclear power plant orders and normalization of earnings.

The share price of Daewoo Engineering & Construction has already risen sharply. From the beginning of this year to May 28, it climbed 566.2% based on closing prices. If measured against the highest price reached during the year, the increase amounts to 956.3%. This far outpaces the KOSPI's performance over the same period. However, the stock fell 27.3% from the start of this month until May 28, indicating that there is also a burden from the recent rapid surge.

The biggest factor driving the share price has been the nuclear power sector. Daewoo Engineering & Construction previously participated as a lead contractor in the construction of four domestic nuclear power plants. It is considered a strong candidate among construction companies likely to join 'Team Korea', which Korea Hydro & Nuclear Power organizes when exporting nuclear power plants overseas.

There are also a considerable number of potential contracts. In addition to the two Czech nuclear power plants it has essentially secured, there are another two in Vietnam that are expected to be confirmed in the short term. The company is also exploring additional participation opportunities in the United States and Saudi Arabia.

The prospect of earnings recovery is further supporting market expectations. In the fourth quarter of last year, Daewoo Engineering & Construction posted a loss of 815.4 billion won after reflecting large-scale expenses. Starting this year, profitability in its civil engineering and plant divisions is said to have entered a normalization phase.

Hyundai Motor Securities forecasts that Daewoo Engineering & Construction will record sales of 8.087 trillion won and an operating profit of 705 billion won this year. The company is expected to swing from a massive loss last year to a profit this year. Net income is also projected to turn from a net loss of 916 billion won last year to a net profit of 426 billion won this year.

In particular, profitability improvements in the housing and building divisions stand out. The gross profit margin (GPM) of this segment is forecast to rise from 11.6% last year to 14.7% this year. The civil engineering and plant divisions are also expected to turn from losses last year to profits this year. The return on equity (ROE) is estimated to recover from -23.9% last year to 11.8% this year, and to reach 14.2% in 2028.

The problem is that these expectations have already been 'priced in' to the share price. Donghyun Shin, a researcher at Hyundai Motor Securities, explained, "Given Daewoo Engineering & Construction's nuclear power workforce, the company is capable of undertaking up to four large nuclear power plant projects simultaneously," adding, "If it wins all four—two in the Czech Republic and two in Vietnam—it will have fully utilized its currently estimated execution capacity."

There is a possibility the company could take on additional projects by adjusting construction schedules. However, some point out that even if new orders continue, it will be difficult to keep justifying the company’s higher valuation unless its actual execution capability to convert these orders into sales and profits expands accordingly.

This content was produced with the assistance of AI translation services.