Construction Stocks Plummet in Q3... Securities Firms Urge Not to Worry

HDC Hyundai Development Company, GS Construction, etc. Poor Performance
"Many Factors for Performance Improvement Next Year"

[Image source=Yonhap News]

[Asia Economy Reporter Park Jihwan] Although major domestic construction companies posted earnings in the third quarter of this year that fell significantly short of expectations, the securities industry believes there is no need for excessive concern. This is because next year is expected to see a genuine improvement in earnings, driven by the realization of high-quality order backlogs and the potential growth of overseas orders.

According to financial information provider FnGuide on the 3rd, HDC Hyundai Development Company recorded an operating profit of 66 billion KRW in the third quarter, down 43.7% from the same period last year. This was an 'earnings shock,' falling far short of the consensus estimate (average of securities firms' forecasts) of 118 billion KRW. Hyundai Engineering & Construction also posted an operating profit of 220 billion KRW, 1.9% lower than market expectations. GS Engineering & Construction and Daewoo Engineering & Construction announced operating profits of 125 billion KRW and 112 billion KRW, respectively, which were 45.9% and 36.9% below estimates.

The poor performance of major construction companies was largely due to one-off costs. Both Daewoo Engineering & Construction and GS Engineering & Construction cited increased cost burdens at overseas sites as a common factor. In the case of HDC Hyundai Development Company, underwhelming domestic housing supply trends and delays in large-scale station area development projects were identified as reasons for the downward revision of earnings.

Despite these earnings setbacks, the securities industry maintains a positive outlook for the construction sector. Researcher Park Sera of Shin Young Securities evaluated, "Hyundai Engineering & Construction reversed a decline in overseas sales that had lasted for eight consecutive quarters, and although GS Engineering & Construction and HDC Hyundai Development Company fell short of their targets, they recorded meaningful sales growth in domestic architecture and housing sectors, confirming the possibility of external growth next year." In some cases, domestic orders have already exceeded guidance, and considering that some projects were deferred to 2022, the boom is expected to continue through next year. Overseas orders are also expected to rebound from next year due to increased demand for environmental plants aligned with each country's carbon neutrality goals.

The currently undervalued stock prices and the housing construction issues related to the presidential election are factors brightening the investment outlook for the construction industry. Except for Hyundai Engineering & Construction (11.5 times), many construction companies such as HDC Hyundai Development Company (4.4 times), Daewoo Engineering & Construction (4.4 times), and DL E&C (4.6 times) have price-to-earnings ratios (PER) hovering around 4 times, indicating that their stock prices are undervalued relative to their earnings. Kiwoom Securities researcher Han Jiyoung stated, "Construction stocks are expected to be market leaders next year," adding, "Valuations are not expensive, and with policy momentum, a favorable trend is anticipated in the first and second quarters of next year."

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