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Turning around

Full-year earnings to turn around on conservative cost management

In 2023, GS E&C’s building/housing cost ratio reached 100.3% due to expenses related to the Incheon garage collapse and the firm’s subsequent conservative cost management approach. However, the cost ratio improved significantly in 1H24, falling to 91.2% in 1Q24 and 89% in 2Q24―better than the company’s guidance (93-94%) and also solid relative to peers. In 2H24, we expect the cost ratio to remain better than guidance.

For the full year, we expect GS E&C to deliver consolidated revenue of W13tr (-3.5% YoY) and swing to an operating profit of W388.8bn. In 2023, the firm suffered an operating loss of W387.9bn due to the recognition of W552.6bn in provisioning and reconstruction expenses related to the Incheon accident in 2Q23.

Increased orders (GS Inima) and potential sale of subsidiaries

In 2Q24, water treatment subsidiary GS Inima’s order backlog grew to W15.2tr (+W3.7tr from the end-2023 level), including W1.8tr from the Ghubrah III desalination plant project in Oman and W0.9tr from the Cesan sewage treatment project in Brazil. In 3Q24, the Ourinhos sanitation project (W0.9tr) in Brazil will also be reflected. The subsidiary is seeking to win more orders in the Middle East by expanding its concession-focused business model to include engineering, procurement, and construction (EPC).

GS E&C is striving to strengthen its financial position through the sale of subsidiaries. Of note, liquidity conditions should receive a boost from the likely sale of GS Inima shares; we believe the subsidiary could fetch a higher valuation than in the past based on its strong order wins this year. We estimate GS Inima’s value at roughly the mid-W1tr level (2023 revenue of W493bn and net profit of W52.2bn).

Maintain Buy and raise TP to W28,000; top pick in construction

We maintain our Buy rating on GS E&C and raise our target price by 17% to W28,000 (from W24,000). Reflecting cost ratio improvements and recovering market conditions, we revised up our target P/B from 0.46x to 0.55x. Our investment points remain intact, with: 1) housing stocks likely to rebound amid recovering investor sentiment: and 2) GS E&C likely to achieve an earnings turnaround and improve its financial structure.