Technological Advancements And Acquisitions Set To Strengthen Future Opportunities In LNG And Defense Sectors

Key Takeaways

• High-priced LNG carriers in the revenue mix are projected to boost profitability and improve financial health by reducing net debt.
  
• Acquisition of Philly Shipyard and technology advancements aim to enhance revenue growth and profitability in defense and energy sectors.
  
• Potential liquidity risks, currency losses, and market disruptions could strain earnings and profitability, while heavy reliance on LNGC markets may expose future revenue uncertainty.

Catalysts

Operates as a shipbuilding and offshore contractor in South Korea and internationally.

• The increasing proportion of high-priced LNG carriers in the revenue mix is expected to enhance profitability, reducing the impact of losses from older, low-margin contracts. This shift will likely boost net margins and earnings starting in 2025.
  
• Strategic measures like the selective order-taking strategy that emphasizes faster delivery times and securing contracts above market prices aim to maintain a robust order backlog and improve future revenue growth.
  
• The anticipated improvement of cash flow starting in 2025 due to better-aligned production and delivery schedules, particularly for LNGCs, is expected to alleviate the strain on working capital and reduce net debt, positively impacting financial health.
  
• The acquisition of Philly Shipyard positions the company to capitalize on the growing U.S. defense market, potentially enhancing revenue streams from naval defense contracts and improving long-term earnings.
  
• Advancements in the Offshore Business Unit's technology and selective project management strategies are set to improve profitability in both conventional and renewable energy sectors, positively influencing future earnings.

Hanwha Ocean Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hanwha Ocean's revenue will grow by 9.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 8.3% in 3 years time.
• Analysts expect earnings to reach ₩1061.1 billion (and earnings per share of ₩3495.63) by about December 2027, up from ₩211.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.8x on those 2027 earnings, down from 52.2x today. This future PE is lower than the current PE for the KR Machinery industry at 22.7x.
• Analysts expect the number of shares outstanding to decline by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.38%, as per the Simply Wall St company report.

Hanwha Ocean Future Earnings Per Share Growth

Risks

• The company reported a negative net income for Q3 2024, partly due to losses from currency fluctuations and increased outsourcing costs, which could negatively impact earnings if such challenges persist.
  
• A significant increase in total liabilities and net debt indicates potential liquidity risks that may strain financial health, impacting net margins and shareholder value.
  
• Ongoing production stabilization costs and labor-related challenges suggest that profitability recovery could lag behind industry peers, affecting future earnings and profit margins.
  
• The geopolitical uncertainties, such as the conflict between Ukraine and Russia and tensions in the Middle East, could disrupt market conditions and order outlook, potentially affecting revenue streams in the shipbuilding and naval sectors.
  
• The heavy reliance on the LNGC market for future profitability and the slow recovery in Offshore business profitability pose risks if demand or prices fluctuate unfavorably, impacting projected revenues and net margins.

Valuation

• The analysts have a consensus price target of ₩37828.57 for Hanwha Ocean based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩45600.0, and the most bearish reporting a price target of just ₩28000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₩12816.3 billion, earnings will come to ₩1061.1 billion, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 8.4%.
• Given the current share price of ₩36000.0, the analyst's price target of ₩37828.57 is 4.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.