[Click e-Stock] "New Orders May Be Delayed"... Construction Firm's Earnings Set to Recover Next Year

Samsung Securities lowered its target price for Daewoo E&C to 18,000 won from 21,000 won, while maintaining its Buy rating.

On Oct. 29, Heo Jaejun, a researcher at Samsung Securities, said, "We lowered our target price to reflect downward revisions to our short-term earnings estimates, but took into account the still-solid order momentum."

Heo forecast, "A short-term contraction in the plant division's earnings is inevitable as high-margin plant projects come to an end. However, earnings should improve again starting next year as revenue from Turkmenistan and Mozambique ramps up. The civil engineering division is also expected to see earnings contract in the second half of this year due to declining revenue from overseas sites in Iraq and seasonal factors, but it could recover starting next year as the company secures new projects and expands revenue from domestic sites."

In the third quarter of this year, consolidated revenue fell 7.4% year over year to 1.8424 trillion won, while operating profit surged 223.8% to 183.2 billion won. Operating profit exceeded the consensus estimate by 12.8%. Heo explained, "Revenue came in below market expectations due to the completion of work at existing housing and overseas plant sites. However, strong profitability in the housing and construction divisions helped operating profit exceed consensus. In the construction division, adjustments to the estimated costs to complete projects and gains from final settlements upon completion of about 96 billion won contributed to a solid profit margin. However, provisions for bad debts totaling 73.3 billion won for unsold homes at sites completed outside the Seoul metropolitan area were reflected in selling, general and administrative expenses, partially offsetting the improvement in earnings."

Daewoo E&C may have difficulty meeting its new order target of 2.7 billion won this year. Cumulative new orders through the third quarter totaled 12.5 trillion won, equivalent to 46.2% of the target. Heo said, "The company could meet its target on the back of a pipeline of five large-scale projects worth about 18 trillion won, including the Dukovany nuclear power plant in the Czech Republic and the Indorama fertilizer plant in Nigeria. However, depending on negotiations with clients, contracts for key pipeline projects could slip from the end of this year to early next year."

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