Believing that the shipbuilding industry has now entered an expansion phase, we change our valuation method for the shipbuilding sector from P/B to P/S multiple. While SHI lags behind its peers in margin recovery, the firm appears undervalued for its business size. High oil price trend should serve favorable for SHI in dealing with accumulated drillship inventories.

Overly undervalued for its business size; SHI outsizes HMD

Upgrading our investment rating from Hold to Buy on Samsung Heavy Industries (SHI), we also raise our TP from W6,700 to W7,500. Judging that the global shipbuilding industry has now turned to an expansion phase, we switch our valuation method for shipbuilding shares from P/B to P/S multiple method. Our target P/S multiple (1.0x) for SHI is at a 20% discount to the figures for its competitors, because of SHI’s slower pace of earnings recovery than its peers.

4Q21 preview: Weak margins and undelivered drillship issue

SHI is estimated to book 4Q21 sales of W1,741.8bn and operating losses of W101.1bn. Its recurring OPM is estimated at -1.2%, but we note that this figure is reflective of both: 1) depreciation and maintenance cost for undelivered drillships; and 2) cost related to the management-labor union settlement.

The decline in the value of undelivered drillships, however, has no relationship with SHI’s present cash flow, and also should have only limited impact upon its future management. Moreover, one of the five undelivered drillships was leased to Saipem in 2021 (under a condition of purchase) and the firm is to sell one more around 1Q23.

Wild waves still coming in: Will SHI’s commitment to offshore business pay off?

SHI has been the most committed, among domestic shipbuilders, to the offshore business. With the offshore market still deep in a recession, its earnings recovery has been lagging its domestic competitors. It remains uncertain whether SHI will be able to make a turnaround this year, with undelivered drillships continuing to weigh on its earnings.

However, we expect the firm to see sustained earnings improvement, going forward, thanks to portfolio reshuffle towards shipbuilding. Moreover, it should be noted that SHI is a strong player in the LNG carrier market. In addition, the offshore drillship market has been recovering since 2018, backed by: 1) exit of old and low-spec drillships; and 2) recovering offshore oil/gas mine expansion project market amid oil price hikes.
Source: Business Korea