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Construction 1Q14 preview: Acceptable but earnings to diverge from 2Q

April 09, 2014 17:14|April 09, 2014 17:14
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▶ We forecast 1Q14 sales at major seven builders would fall 1.3%YoY but OP to return to black (Figure 1). Major builders seem to have recovered from the earnings shocks at GS E&C and Samsung Engineering (Samsung Eng.) in 1Q13. However,
meaningful improvement is unlikely as sales would shrink at most builders except Samsung C&T, Hyundai E&C and Hyundai Development (Hyundai Dev.). Samsung C&T and Daewoo E&C will likely beat the consensus.
▶ Generally, companies do not book much provisioning in 1Q as it is a slow season. Aside from fines for bid-rigging on the Incheon/Daegu subway and Gyeongin canal to be booked as non-operating costs, there will be no specific issue. We will be
able to distinguish the earnings direction and divergence in the 2Q results.
▶ Big swing factors for shares are the pre-sale results that should begin in earnest from April and major overseas order results such as the RAPID complex (8 pkgs) in Malyasia and Lower Fars Heavy Oil (USD4.2bn) in Kuwait.
▶ After the shock in 2013, builders are preparing for earnings to get back to normal in 2015. Investment focused on earnings upside in 2015 is needed rather than results in 2014. Considering earnings improvement would diverge largely by the degree
of balance sheet cleaning, balance sheet-focused investment strategy is still intact. We maintain Daelim Ind. and Samsung C&T as our top picks by also considering valuations and Hyundai Dev. is second-favored. In particular, downside risk for Daelim Ind. and Hyundai Dev. is limited as they reflected most of the potential losses in 4Q13. Share price movements will likely be determined by subscription rate for pre-sales and order flows, meaning there is big upside.
*Source: Korea Investment & Securities Co.