Consolidated OP of W676bn, 10.7% below consensus We believe separate 2Q16 OP of W652bn (+12% QoQ, +7.3% YoY) will miss our previous estimate by 9.3% and consensus by 3%. Due to expansion work at the
Gwangyang #5 blast furnace (from 3,950 cubic meters to 5,500 cubic meters), 2Q16 shipments should reach only 8.76mn tonnes; shy of our previous estimate of 8.96mn tonnes and the biggest reason for the lower OP outlook.
Meanwhile, consolidated OP should reach W676bn (+2.5% QoQ, -1.5% YoY), 16.3% below our previous estimate and 10.7% below consensus. Although losses at overseas steel subsidiaries should narrow on improving market conditions, POSCO E&C booked substantial expenses as construction of Brazil CSP was delayed.
While steel results improve on a better market, the heavy expenses at POSCO E&C are disappointing.
Quarterly shipments to exceed 9mn tonnes from 2H16Gwangyang #5 blast furnace expanded CR capacity by 1.5mn tonnes p.a.(maximum 2mn tonnes). As such, quarterly shipments should exceed 9mn tonnes from 2H16. Quarterly shipments reached 9.16mn tonnes in 4Q15, but fell back to 8.7mn tonnes in 1H16. Going forward, quarterly shipments should remain over 9mn tonnes. As such, fixed costs per unit should decrease, thereby bolstering profitability.
Consolidated OP to improve in 2H16In 2H16, we forecast consolidated OP will increase, as: 1) the effects of price markup in 1H16 are reflected, 2) higher shipments reduce the fixed costs per unit, and 3) one-off losses at subsidiaries do not recur. As such, we forecast consolidated OP will grow 34.2% from W1,336bn in 1H16 to W1,793bn in 2H16.
Time to buy again, maintain BUY with TP of W310,000
2H16 consolidated OP should improve, as: 1) China’s steel prices rebounded after the merger of Baoshan and Wuhan, 2) prices should continue to trend up as China’s rebar spread is below the BEP level and crude steel production in China is trending down, 3) fixed cost effects should improve profitability, and 4) one-off costs from subsidiaries should not recur. We believe now is the time to buy POSCO shares again. We maintain BUY with a TP of W310,000, applying a target PB of 0.6x to 12MF BPS of W510,326.
Source: Korea Investment & Securities
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