The author is an analyst of Shinhan Investment Corp. He can be reached at firstname.lastname@example.org. -- Ed.
In the midst of internal changes
SeAH Besteel is Korea’s largest special steelmaker with domestic market share of over 40% as of 2019. The company is expanding nonferrous metal and special steel operations. First, it increased its stake in SeAH Changwon Integrated Special Steel to 100% in March 2020. Second, the wholly-owned subsidiary established CTC in 3Q19 to manufacture seamless stainless steel tubes for export to China. Third, SeAH Besteel acquired a 100% stake in Arconic Korea (renamed SeAH Aerospace and Defense) in March 2020, a manufacturer of aluminum-zinc alloy products for the aerospace and defense industries.
The entry of new competition into the special steel market had prompted SeAH Besteel to reduce the portion of automotive steel sales, and increase exports via overseas subsidiaries and supply of high valued-added products such as bearing steel.
2020 forecasts: Sales KRW2.7tr (-8% YoY), OP KRW44.9bn (+2% YoY)
For 2020, we forecast sales at KRW2.7tr (-8% YoY) and operating profit at KRW44.9bn (+2% YoY). Earnings slump at overseas subsidiaries will likely continue in 2Q. Iron ore prices are projected to rise due to the spread of COVID-19 pandemic in iron ore producing countries and growing demand in China. Iron scrap prices should also climb. Sales, however, are expected to rebound from 2H20 as domestic automakers recently resumed production at their overseas plants. SeAH Aerospace and Defense will be included in consolidated statements from 2Q. Despite lower sales volume, the newly acquired firm is forecast to make a visible contribution to consolidated earnings with its high profit margin.
Initiate coverage with BUY for a target price of KRW12,700
We initiate our coverage of SeAH Besteel with BUY for a target price of KRW12,700, based on 2020F BPS and a target PBR of 0.24x. Shares are currently trading at below 2020F BPS of 0.2x, undervalued compared to the past. Investment points are: 1) diversification of special steel products; 2) overseas market forays and efforts to reduce the share of automotive steel sales; and 3) eased pricing pressure on SeAH Changwon Integrated Special Steel with upturn in nickel prices in 2Q. The special steel subsidiary was a major help for SeAH Besteel in defending earnings in 1Q and should continue to deliver solid results.