[Click eStock] "Daewoo Construction, Poor Performance and Potential Costs... Target Price Down"

Daishin Securities analyzed on the 1st that Daewoo E&C faces potential cost increases and cash flow concerns. While maintaining the investment rating of 'Buy,' the target price was lowered by 10% from the previous 6,000 KRW to 5,400 KRW. Daewoo E&C's closing price on the previous trading day was 4,060 KRW.

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Researcher Lee Taehwan of Daishin Securities stated, "Along with the Q2 2024 earnings announcement, we have lowered the target price to 5,400 KRW," adding, "This is based on the application of a price-to-book ratio (PBR) of 0.54 times to the expected book value per share (BPS) of 10,022 KRW for 2024." The target PBR reflects a 20% discount applied to the theoretical PBR calculated using the PBR-ROE method based on the expected return on equity (ROE) for 2024.

Daewoo E&C's consolidated sales for Q2 decreased by 13.8% year-on-year to 2.8 trillion KRW. Operating profit fell by 51.9% to 104.8 billion KRW. The operating margin dropped 2.4 percentage points from the previous year to 4.3%, falling short of market expectations.

Specifically, the cost ratio in the housing construction sector improved compared to the previous quarter but remained high at 92.8%, down from 93.4% in Q1. Notably, in the civil engineering sector, cost increases at overseas sites (Singapore and the Middle East) were reflected, causing the cost ratio to rise sharply to 96.7% (compared to 89.1% in Q1). Although sales from the sale of THT land in Vietnam were recognized earlier than expected in Q2, the resulting profit was offset. Additionally, selling and administrative expenses increased due to a proactive recognition of 52 billion KRW in bad debt write-offs related to unsold inventory risk after completion at some local sites.

Researcher Lee commented, "While the conservative and proactive cost recognition has positive aspects, it is regrettable that bad debt write-offs for unsold units after completion have occurred repeatedly," adding, "Currently, there are 6,600 unsold units, so the possibility of recurrence cannot be ruled out, and cash liquidity remains insufficient until final payments are collected from completed sites."

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