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Housing cost ratio continues to improve

2Q24 review: OP beats consensus by 17%

For 2Q24, GS E&C reported consolidated revenue of W3.3tr (-5.7% YoY) and operating profit of W93.7bn (swinging to profit YoY), with the latter result beating the consensus (W80.1bn) by 17%. The company swung to an operating profit YoY mainly due to a favorable comparison arising from significant one-off costs incurred in 2Q23 (i.e., provisioning related to the Incheon garage collapse accident). The building/housing division’s cost ratio continued to improve, falling to 89.0% (from 112.5% in 2Q23 and 91.2% in 1Q24) thanks to increased contract values and settlement gains. However, the cost ratio for the civil works/plant division exceeded 100% due to delay penalties for overseas projects (Iraq and Singapore) and inflation-driven cost increases.

Building/housing cost ratio likely to remain better than guidance in 2H24

In 1H24, the building/housing division’s cost ratio was better than management’s guidance (91.2% in 1Q24 and 89% in 2Q24 vs. guidance of 93-94%), which we attribute to conservative cost management following the Incheon accident in 2023. In 2H24, we expect the cost ratio to remain better than guidance, as the positive effects of cost ratio adjustments should become more pronounced as new projects start to break ground.

In 1H24, new order wins totaled W8.3tr (including W4.9tr from overseas), representing 63% of the 2024 guidance. Significant orders included GS Inima’s Ghubrah III desalination plant project (W1.8tr) in Oman and the Cesan sewage treatment project (W0.9tr) in Brazil. Notably, GS Inima saw additional order momentum in July with the signing of a concession contract for the Ourinhos sanitation project (W0.9tr) in Brazil. In 2H24, the plant business will likely secure more orders from group affiliates (e.g., GS Caltex, LG Chem, etc.).

Maintain Buy and raise TP to W24,000; second-most preferred pick in construction

We maintain our Buy rating on GS E&C and raise our target price by 14% to W24,000 (from W21,000), as we revised up our target P/B from 0.40x to 0.46x (our average target multiple for large housing-oriented construction companies under our coverage) after removing the discount rate applied following the Incheon accident. Of note, liquidity conditions should receive a boost from the likely sale of GS Inima shares (and the subsidiary could fetch a higher valuation than in the past following order wins this year). The stock remains our second-most preferred pick in the construction sector.