[Click eStock] Hyundai Electric, Steady Growth... A Safe Investment in the Machinery Sector

[Asia Economy Reporter Lee Seon-ae] Daol Investment & Securities announced on the 22nd that it is initiating coverage on Hyundai Electric with a buy rating and a target price of 29,000 KRW. The target price reflects strong order intake from the Middle East and North America confirmed since Q1, as well as earnings growth in the second half of 2022 and 2023 driven by the shipbuilding boom. It applies a target price-to-earnings ratio (PER) of 15 times to the weighted average EPS for 2022 and 2023, which are 33% and 67%, respectively. The appropriate price-to-book ratio (PBR) target price is based on a 1.5 times PBR at a 7.7% return on equity (ROE) for 2022 and a 1.3 times PBR at a 10.4% ROE for 2023.

Choi Kwang-sik, a researcher at Daol Investment & Securities, said, "Hyundai Electric is a safe investment that continues to enjoy a profit growth cycle within the machinery sector," adding, "The current stock price is only 10 times the 2023 EPS, which reflects the good orders currently being converted into earnings."

Despite an 8% decrease in sales in Q1 2022 compared to the same period last year, the operating margin of 4.8% indicates that raw material price inflation is being sufficiently passed on to prices. Considering the fixed cost effect from increased sales in Q2 and the second half, annual profitability is expected to be better than in Q1.

Since the large-scale loss from a major project in 2018, the company has clearly adopted a selective order policy. Although orders from the Middle East have decreased, overall company performance has normalized. Under the same order strategy, Middle East orders are now significantly increasing, indicating good profitability. The U.S. market is in high demand. Although there was a one-time slump in Q4 last year due to raw material price increases, Q1 this year returned to a high single-digit operating margin. The U.S. transformer/circuit breaker PPI currently stands at 40% year-over-year. The U.S. is even negotiating to place orders with Korea despite anti-dumping tariffs. Price increases are strong. Raw material prices are being fully passed on. Although raw material inflation is occurring, it can be immediately reflected in prices. Selective orders from the Middle East and raw material price pass-through volumes from shipbuilding and the U.S. will start from Q3 this year and be fully realized in Q4. Accordingly, the company’s operating margin is expected to be higher in the second half than in the first half.

This year’s orders are trending to significantly exceed the target of $1.827 billion (2.2 trillion KRW). Researcher Choi emphasized, "Sales in 2023 are expected to grow another 10%, conservatively assuming no volume leverage and maintaining the second half’s profit margin trend," adding, "The 2023 earnings are likely to be revised upward in the future, as the recent price increases and selective orders are not fully reflected in the current operating margin estimate of 5.8%."

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