Backed by likely high earnings growth at its FuelCell division and reduced operating losses at its DFS business, operating profit at Doosan Corp’s inhouse domain is set to rise in 2H16. Moreover, the firm’s consolidated financial structure and shareholder value should also improve going forward.

Currently trading at a 48% discount rate to NAV, we view Doosan Corp’s shares as offering valuation merit. In-house business earnings to be strong in 2H16

We estimate that Doosan Corp’s operating profit will reach W51.8bn in 3Q16 and W58.5bn in 4Q16.



By division, the electro-materials division is forecast to post quarterly operating profit of about W20bn through 2H16, as its successful product diversification (greater portion of high value-added products) should help ease high quarterly earnings volatility related to the smartphone roll-out cycle. Meanwhile, the industrial vehicles division should return to positive y-y growth from 2H16.

We point out that in the run up to the strengthening of domestic regulations on exhaust emissions in Sep 2015, there was a temporary jump in sales at the division. However, the impact of such high-base effect on the division’s 2H16 sales should be blunted by a new product launch.

In 2H16, we believe that significant operating profit improvement will be seen at both Doosan Corp’s duty free shop (DFS) business and its FuelCell division.

Opened in May, the firm’s DFS booked a large 2Q16 operating loss of W16.0bn.

But, we expect it to display smaller operating losses going forward. In particular, we believe that DFS sales—having now climbed to W400mn/day— will enhance further once the DFS fully opens in October. Elsewhere, we point out that the FuelCell division’s new orders tend to concentrate in 2H as the payout of government subsidies in the US and budget executions at domestic downstream players both usually take place in the second half. As such, the division should help drive overall 2H16 earnings growth.

Consolidated financials and shareholder value to improve

On Aug 16, Bobcat passed its preliminary listing eligibility review. The Bobcat listing (expected around end-October) will likely represent the last phase in Doosan Corp’s current drive to restructure its subsidiaries and to dispose of some of its assets/businesses.

The IPO should provide Doosan with sufficient liquidity and opportunity to improve its consolidated financial structure.

Going forward, we expect shareholder value to enhance on: 1) the in-house divisions’ likely healthy operating profit growth of W179.7bn (up 16% y-y) in 2016 and W235.2bn (up 31% y-y) in 2017; 2) a better DPS (2015: W4,550/share → 2016E: W5,000/share),

backed by Doosan Corp’s disposal of its stakes in KAI and Doosan DST; and 3) a planned treasury stock retirement program (to be performed over a period of more than three years starting in 2016; at least 5% to be cancelled pa).

We note that Doosan’s shares are currently trading at a 48% discount rate to NAV. This discount should be alleviated going forward by improvements in: 1) the company’s consolidated financials; 2) earnings at major subsidiaries; and 3) the firm’s shareholder value. Given this upbeat outlook, we maintain Doosan Corp as our sector top pick.

Source: NH Investment & Securities