Liquidity Constraints May Pressure Margins, But US Navy MRO Market Entry Will Strengthen Competitiveness

Key Takeaways

• Rising LNGC projects increase working capital needs, impacting cash flow and future liquidity, potentially pressuring net margins.
  
• Increased debt from projects heightens financial risk and raises interest expenses, potentially lowering net earnings.
  
• The strategic focus on high-margin projects and market expansion, supported by favorable market conditions, positions Hanwha Ocean for strong future revenue and profitability growth.

Catalysts

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

• Rising production volumes in LNGC construction and new offshore projects have significantly increased working capital requirements, impacting cash flow and potentially constraining future liquidity, which could pressure net margins.
  
• The confirmation of a strong order backlog and a demand rise for LNG carriers may lead to temporary price reductions and competitive pricing pressure, potentially compressing revenue growth.
  
• Geopolitical uncertainties and high inventory levels might lead to unpredictable demand fluctuations for naval and commercial vessels, resulting in potential revenue volatility.
  
• The increased liabilities and debt levels from accelerated project execution and capital investments may heighten financial risk and elevate interest expenses, potentially lowering net earnings.
  
• The impact of exchange rate fluctuations, though positive recently, could reverse and create volatility in future revenue and profit projections, further affecting the predictability of earnings.

Hanwha Ocean Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hanwha Ocean's revenue will grow by 8.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 7.4% in 3 years time.
• Analysts expect earnings to reach ₩930.3 billion (and earnings per share of ₩3048.05) by about January 2028, 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 21.1x on those 2028 earnings, down from 82.2x today. This future PE is greater than the current PE for the KR Machinery industry at 14.2x.
• Analysts expect the number of shares outstanding to decline by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.08%, as per the Simply Wall St company report.

Hanwha Ocean Future Earnings Per Share Growth

Risks

• The shift in product mix towards higher-margin LNG carriers, along with the stabilization of raw material prices and favorable exchange rates, has significantly improved profitability, suggesting potential earnings growth.
  
• The continued strong demand for LNGC and VLGC new builds, driven by geopolitical factors and energy policy shifts, is expected to sustain revenue, indicating positive future revenue growth prospects.
  
• The company's strategic acquisition of the Philly Shipyard and entry into the U.S. Navy MRO market positions it well to capture growth opportunities in the global defense market, likely contributing positively to revenue and profitability.
  
• Hanwha Ocean's selective order strategy and focus on high-margin projects help maintain a stable order backlog reducing risk of revenue volatility and supporting steady profit margins.
  
• Continued investments in enhancing production capabilities and expanding into new markets are expected to strengthen business competitiveness, suggesting potential for future revenue and profit margin improvements.

Valuation

• The analysts have a consensus price target of ₩50857.14 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 ₩70000.0, 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 2028, revenues will be ₩12525.4 billion, earnings will come to ₩930.3 billion, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of ₩56700.0, the analyst's price target of ₩50857.14 is 11.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.