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Our top pick in uncertain times

4Q24 preview: Below-consensus OP likely

For 4Q24, we expect DL E&C to report consolidated revenue of W2.34tr (+0.2% YoY) and operating profit of W82bn (-7.1% YoY), with the latter missing the consensus (W93.8bn). We assumed that the company: 1) did not reflect an increase in the contract value for the LH public-private partnership project; and 2) recognized W68.7bn in non-operating expenses, including provisions for unrecovered construction costs at DL Construction. However, the impact of these variables on quarterly results could vary depending on the timing of recognition. Meanwhile, we estimate the firm recognized roughly W90bn in FX gains due to a higher USD/KRW rate, boosting pretax profit.

2025 outlook: Profit growth to continue despite revenue slowdown

For 2025, we look for consolidated revenue of W8.14tr (-1% YoY). While housing revenue is likely to decline due to a slowdown in construction starts, we forecast plant revenue to expand, helping to minimize the fall in company-wide revenue.

We forecast 2025 consolidated operating profit at W345.9bn (+34% YoY). We expect the housing cost ratio to improve by around 2%p YoY on: 1) an increase in the contract value for the LH project (assumption: W32bn in total); and 2) mix improvements stemming from the completion of low-margin projects. We also expect DL Construction to contribute to a profit rebound due to a favorable base (following large-scale cost adjustments and provisioning in 2024).

Retain Buy and TP of W46,000; our top construction pick

We maintain our Buy rating on DL E&C with a target price of W46,000 (target P/B of 0.4x) and present the stock as our top pick in the construction sector. Amid uncertain market conditions, the firm is likely to stand out due to its stable financial position, solid earnings growth outlook, and enhanced shareholder returns. Notably, the firm announced that it would increase the allocation of profits for share buybacks (from 5% to 15% of consolidated net profit attributable to owners of the parent), which suggests that it is likely to buy back over W20bn worth of shares in 2025. Additionally, the value of its more than 1% stake in US small modular reactor (SMR) manufacturer) X-energy is likely to come into focus.