Daewoo E&C: Cost-to-sales Ratio Rising at Housing Division

The author is an analyst of NH Investment & Securities. He can be reached at [email protected]. –Ed.

In 2Q22, Daewoo E&C witnessed a rise in cost-to-sales ratio at the housing division, due mainly to one-off cost burden (hikes in construction materials prices). Given today’s gloomy market conditions, a housing division recovery is unlikely in 2H22. That said, we forecast that cost-to-sales ratio will normalize and that the firm will secure overseas orders for nuclear power and LNG projects in 2023.

Recovery to take time

While reiterating a Buy rating, we slash our TP for Daewoo E&C from W7,700 to W6,500, given that amid a rising cost-to-sales ratio at the housing business and jitters over real estate market conditions, we lower: 1) our 12-month moving average EBITDA estimate from W8,748 to W7,722 for the construction division; and 2) our EV/EBITDA multiple from 3.7x to 3.5x. But, we adhere to a Buy rating, as: 1) earnings adjustment stemming from cost-to-sales ratio increase should slow in 2023; and 2) chances are strengthening for the winning of nuclear power orders from countries such as Poland and the Czech Republic. The builder is trading at a 2022E P/E of 5.9x, and its OPM is projected at 6.1% for 2022 and 5.9% for 2023.

Housing division: Cost increase reflected in 2Q22, cost-to-sales ratio to remain high in 2H22

Daewoo E&C posted consolidated 2Q22 sales of W2.4tn (+11% yy) and OP of W86.4bn (-55% yy), with OP falling far short of both our estimate and consensus due to cost reflection of around W120bn at the housing division, stemming from: 1) a rise in materials and outsourcing costs related to higher building materials and labor costs; and 2) hiked repair and maintenance costs. Cost-to-sales ratio at the housing division climbed to 93.2% (+8%p qq).

For 2022, we forecast housing sales at around W6.0tn and adjust our cost-to-sales ratio estimate by 2.0%p to reflect recent raw materials issues. Without a steep drop in construction materials prices in the near future, cost-to-sales ratio will likely stay high in 2H22. In detail, cost-to-sales ratio at the housing division (including projects on self-owned lands) is set to climb by more than 4%p in 2H22 to 89% (vs past five-year average of 85%).

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