Posted on 29 Mar 2021
Expected to show a strong profit recovery, POSCO’s 1Q21 earnings should exceed forecasts thanks to ASP increase. Along with economic recovery, expectations for China to cut steel production to reduce carbon emissions are positive for POSCO’s share price. Against this backdrop, we expect the environment to be similar to that seen between 2016 and 2018.
Profit recovery strengthening; China’s carbon reduction policy anticipated
Adhering to a Buy rating, we raise our TP on POSCO by 20.0% to W420,000. Our TP equates to a 2021E P/B of 0.8x (ROE of 6.5%), and we estimate 2021 DY (based on the Mar 25 closing price) at 3.2% (DPS of W10,000). Reflecting the rise in steel prices, we raise POSCO’s EPS forecast for 2021 and 2022 by 19.5% and 19.6% respectively.
We note that the Chinese government has mentioned cutting 2021 steel production to reduce carbon emissions. Even if the actual amount of crude steel production remains untouched, any policy materialization should be positive for steel company share prices. Given this backdrop, POSCO shares are likely to enter an environment similar to that seen between 2016 and 2018, when: 1) economic recovery was in play, leading to rising interest rates and inflation; and 2) supply containment policies were in place. Over that period, POSCO’s shares reached a P/B of 0.8x.
Consolidated 1Q21 OP to exceed market expectations
We expect POSCO to report 1Q21 sales of W15.6tn (+7.5% y-y, +2.4% q-q), OP of W1.4tn (+93.2% y-y, +57.8% q-q), and NP (excluding minority interests) of W816.8bn (+106.6% y-y, +16.5% q-q), with sales arriving similar to consensus and OP and NP (excluding minority interests) outstripping the market projections by 14.1% and 11.4% respectively.
Overall performance improvement is expected to be driven by ASP growth at the steel business. We note that domestic steel prices are rising strongly following an uptick in international steel prices. We expect that on a non-consolidated basis, carbon steel ASP will climb from W679,000/ton in 4Q20 to W746,000/ton in 1Q21 and W784,000/ton in 2Q21. As a result, POSCO’s non-consolidated 1Q21 OP should reach W981.6bn (+114.3% y-y, +87.4% q-q), the highest level seen in ten quarters.
Source:Business Korea
