[Click eStock] "GS Geonseol, Housing Sector to Drive Growth in Second Half"

Q2 Earnings Miss Consensus Due to Bond Call
Housing Sector Profitability Increases...Gross Profit Margin at 26.3%
Meritz Securities Maintains GS Geonseol Target Price at 57,000 Won

[Asia Economy Reporter Gong Byung-sun] GS Construction posted second-quarter earnings this year that fell short of market consensus due to a sudden bond call. However, it is expected to show results exceeding consensus in the second half of the year, along with growth in the housing sector.

According to Meritz Securities on the 29th, GS Construction's sales in the second quarter recorded 2.232 trillion KRW, down 12.4% from the same period last year, and operating profit was 125 billion KRW, down 24.2% during the same period. These figures are 10.74% and 14% below the respective consensus estimates of 2.5006 trillion KRW and 145.4 billion KRW.

The second-quarter results falling short of consensus are interpreted as due to the bond call. A bond call refers to a financial institution providing a guarantee for a large construction project but having to pay the guarantee to the client due to the construction company's contract breach. The client of the Singapore Marina South mixed-use development, completed in October 2017, exercised a bond call worth 53.7 billion KRW against GS Construction, which caused a sharp decline in operating profit.

(Provided by Meritz Securities)

However, housing sales with improved profitability are expected to improve results from the third quarter. Sales in the architecture and housing sector in the second quarter were about 1.4 trillion KRW, down 5.1% from the same period last year, but the gross profit margin on housing sales was high at 26.3%. Hyung-ryeol Park, a researcher at Meritz Securities, said, “Completion settlement profits occurred at three project sites, and some sites carried out cost rate rationalization projects, improving profitability in the housing sector. Considering the current profitability of the housing sector, second-half results are expected to exceed consensus.” GS Construction’s third-quarter sales and operating profit consensus are 2.5476 trillion KRW and 233.7 billion KRW, respectively.

Housing sales and overseas infrastructure orders, which will contribute to long-term growth, are also expected to proceed smoothly. GS Construction has sold 14,500 housing units as of this month, which is 45.8% of the early-year guidance of 31,600 units. In the second half, an additional 17,000 units are expected to be sold, mainly through housing outsourcing and urban maintenance projects, meeting the guidance. The overseas infrastructure order sector is also growing. GS Construction succeeded in entering the Australian market for the first time by being selected as the preferred negotiator for the Australia ‘North East Link’ project. Profits related to the 1.4 trillion KRW Oman seawater desalination project are expected to be recognized from the second half of the year.

Accordingly, Meritz Securities maintained a ‘Buy’ investment opinion and a target price of 57,000 KRW for GS Construction. The closing price on the previous day was 44,800 KRW. Researcher Park said, “Considering the 2022 listing plan of the subsidiary Inima, performance growth and momentum can be highlighted simultaneously.”

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