[Click e-Stock] "Kyungdong Navien Expected to Recover Earnings Amid Undervalued Appeal"

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On April 13, Shinhan Investment Corp. analyzed that Kyungdong Navien is becoming increasingly attractive to investors, as improvements in its business environment and valuation appeal are coming to the fore despite a temporary decline in profitability due to accounting factors.

Seonggyu Heo, a researcher at Shinhan Investment Corp., stated, "Last year's fourth-quarter temporary deferred corporate tax expense resulted in an effective corporate tax rate of 65.6%, which led to an approximately 28% year-on-year decline in annual net profit." He added, "While the financial statement profitability worsened, the business environment remains favorable, and the company is currently trading at a projected price-to-earnings ratio (PER) of 6.8 for this year." He further noted, "Considering competitor AO Smith's PER of 17.5 and the five-year average PER of 10.6, Kyungdong Navien's valuation is very attractive."

The company’s performance is expected to continue a gradual recovery. Kyungdong Navien's first-quarter sales for this year are projected to reach 401.3 billion won, up 9.9% from a year earlier, while operating profit is expected to increase by 2.4% to 40.4 billion won. The operating profit margin is estimated at 10.1%. Heo explained, "Export data for water heaters and boilers is slightly higher compared to the period from 4Q24 to 1Q25, so the upward trend in performance is likely to continue." He added, "The local business environment is also positive, as the 5% price increase in December has not affected shipment volumes."

The North American market environment is also favorable. Some replacement demand emerged in the fourth quarter due to cold waves, and both price increases and tariff relief are expected to improve profitability. Heo noted, "While 5% price hikes were implemented in both June and December last year, the general tariff rate dropped to 10% as of February this year," and, "Tariffs on steel and aluminum, which will be applied in April, are also expected to have a favorable effect, so profitability is likely to increase gradually throughout this year." However, he added, "Although the exchange rate was favorable in the first quarter, with last year's average at KRW 1,450 per dollar, the incremental profit effect is limited."

Changes in the business portfolio are also cited as a positive factor. Kyungdong Navien is expanding beyond its existing focus on water heaters into the HVAC (heating, ventilation, and air conditioning) business. Heo commented, "In February, the company participated in a North American exhibition as an HVAC company rather than a plumbing firm," and, "It is expected to continue benefiting from hydro condensing furnaces and hybrid water heaters." He also explained, "Even though federal eco-friendly subsidies in the United States have ended, support from state governments continues."

The effect of affiliates is also expected to be reflected in performance. He stated, "The consolidated effect of Commax, a smart home company, will be reflected from the first quarter," and, "As the company is targeting to break even this year, the impact on profitability will be limited." He also added, "Combined with Navien Magic, domestic sales are expected to increase by more than 100 billion won."

Heo emphasized, "Although there has been a lack of interest following performance fluctuations due to tariffs, the HVAC business is expected to moderate the seasonal volatility of water heater earnings in the mid- to long-term."

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