Despite avoiding the red ink that tarred South Korea’s big three shipbuilders, Hyundai Mipo Dockyard’s (HMD’s) profit in the second quarter of 2015 camouflages its actual situation, said a sector analyst.
HMD, a subsidiary of Hyundai Heavy Industries, posted a KRW10.915 billion (USD9.3 million) profit for the second quarter of 2015, reversing a KRW199.22 billion loss for the second quarter of 2014.
The result was attributed to lower loss provisioning at the shipbuilder’s Vietnamese subsidiary Hyundai Vinashin, favourable foreign exchange movements, and falling steel plate prices.
Samsung Securities analyst Han Young-soo noted that HMD’s operating profit of KRW15.5 billion missed expectations by 30%.
Han said, “HMD would have made a loss if not for provisioning reversals and improving earnings at its financial subsidiary. Second, the company is having a hard time winning orders – it took in just USD500 million in the first half of 2015 (14% of 2014 sales) and its order backlog stands at only USD6.3 billion.”
This suggests that HMD’s 2017 sales forecasts will be cut unless product tanker orders recover in the second half of 2015.
These two factors prompt Samsung Securities to lower its 2016 and 2017 earnings estimates for HMD by 13.7% and 13.6% respectively to KRW91 billion and KRW101 billion.
However, CIMB Securities analyst KJ Hwang believes that HMD could be in for a bonanza of product tanker orders, due to the fact that some companies, notably Scorpio Tankers, have letters of intent to order as many as 30 such vessels. Scorpio alone could order as many as 16 product tankers.
Hwang thus expects HMD’s focus on mid-sized commercial vessels to return it to the black for 2015.
While Han forecasts a KRW43 billion full-year profit for HMD, Hwang is more optimistic, predicting a KRW60 billion profit.
CIMB Securities analyst KJ Hwang’s opinion of the shipbuilder, which had a KRW679.26 billion loss for 2014, could make a KRW60 billion profit for 2015.
Hwang believes that a weakening won and refinery expansions elsewhere in Asia and the Middle East could catalyse product tanker orders.
He said, “Our conviction on HMD is now boosted in view of: 1) ‘zero counter-party risks’ as product tanker owners are now enjoying six-year high time-charter rates, 2) product tanker orders, the key share price driver, recommencing with global refinery throughput hikes, 3) highly consolidated product tanker market (HMD’s 40% market share), and 4) sustainable margin profile (unlike offshore, product tankers incur minimal risk to man-hour inputs, design changes, and delivery delays).”