Posted on 09 Nov 2020
The author is an analyst of KB Securities. He can be reached at swhong@kbfg.com. -- Ed.
Maintain BUY and raise target price to KRW300,000
We maintain BUY and raise our TP by 20% (KRW250,000→KRW300,000) to reflect: (1) An increase in 36m fwd foreseeable ROE (4.3%→4.5%) (2) A drop in cost of equity (7.2%→6.7%) arising from lowered 52w adj. beta Improving demand for steel products should boost product prices and sales volume, which was reflected in our ROE. As a result, we expect 2020-23E CAGR EPS to be 22%. Our P/B-ROE-derived TP (6.7% COE; 4.5% ROE; 1.6% TGR) has 37.0% upside (vs. last closing price), so we maintain BUY. At one point, POSCO’s relative return to the KOSPI was -30% YTD, but the stock’s rebound since October narrowed the underperformance to 11%.
Recovery in automotive steel sheets to underpin earnings turnaround in 2021
For 2021, we estimate K-IFRS consolidated revenue/OP of KRW63.59tn (+8.4% YoY)/KRW3.54tn (+59.0% YoY; 5.6% OPM), which meets the market consensus of KRW3.41tn (as of Nov 4). Currently normalizing manufacturing activity for automakers indicates a move toward recovering sales volume for automotive steel sheets, which would underpin an earnings turnaround. Meanwhile, the effect of cost savings via an increase in the proportion of fine iron ore—which contributed to profitability improvement in 3Q20—should weaken. If the usage of fine iron ore is prolonged, blast furnaces should have problems with air permeability.
Steel sheet spreads to remain flat with upside potential
Putting year-end seasonal factors aside, we think POSCO will see a modest rise in profitability throughout 2021 thanks to continually expanding steel sheet spreads. There is a six-month lag for booking feedstock prices, so the surge in iron ore prices that began in 3Q20 should be reflected in 4Q20-1H21. The recent rebound in met coal prices should add to cost pressure in 1H21, but we expect this to be offset by a rise in steel sheet prices; coal prices gain strength at year-end, driven by heating and hoarding demand.
Source:Business Korea
