[Edaily Reporter Kwon Oh Seok ] Yuanta Securities Korea announced on the 25th that it is maintaining its “Buy” rating on HD KOREA SHIPBUILDING & OFFSHORE ENGINEERING(009540)but lowering its target price from 555,000 won to 532,000 won.

Kim Yong-min, an analyst at Yuanta Securities Korea, explained, “The target price was calculated by applying a 50% holding company discount rate to the equity value based on the market capitalization of listed affiliates. For HD HYUNDAI Samho, an unlisted company, we applied a dividend discount model to assign a fair value of 18.5 trillion won and added net cash on a standalone basis.”
He elaborated, “While the fact that the stock is undervalued relative to operating companies from a NAV (net asset value) perspective is always an investment attraction, conversely, this implies that a premium of 60% or 70%—rather than the typically applied 50% holding company discount rate—is also possible,” adding, “To break away from this, improvements in shareholder returns are ultimately necessary.”
He noted that attention should be paid to the time lag created by the cash flow channel running from HD HYUNDAI to HD KOREA SHIPBUILDING & OFFSHORE ENGINEERING and then to the operating companies. He said, “As the operating companies’ profits are expanding in earnest, the incentive for HD KOREA SHIPBUILDING & OFFSHORE ENGINEERING to buy back and cancel its own shares is growing stronger,” adding, “Considering the capital efficiency of the entire corporate structure, this is a way to permanently increase HD HYUNDAI’s claim on all cash flows generated by the company.”
On a standalone basis, net cash for the first half of this year stood at 3 trillion won, while HYUNDAI INDUSTRIAL CO.,LTD and Hyundai Samho also hold 5 trillion and 2.7 trillion won in net cash, respectively. Analyst Kim noted, “In addition to cash injections from the operating companies—which take the form of special dividends exceeding existing shareholder return targets—the 69.2% stake in HYUNDAI INDUSTRIAL CO.,LTD also represents a potential source of funds that could be further monetized,” and He added, “Rather than expecting a sharp short-term surge in the stock price, investors should focus on the limited downside risk stemming from the holding company discount rate from a risk-reward perspective, as well as the upside potential driven by future cash flows and expanded shareholder returns.”