Investments In Electronic Furnaces And Lithium Ventures Will Strengthen Future Prospects

Key Takeaways

• Strategic investments in electronic furnaces and global steel markets promise improved revenues, operating efficiencies, and enhanced margins through increased capacity and optimization.
  
• Energy Materials business expansion in lithium assets and restructuring efforts are set to boost cash flow, financial performance, and future growth potential.
  
• Oversupply and global trade barriers, coupled with slow EV market growth and restructuring needs, could suppress POSCO's revenues and strain its financial performance.

Catalysts

Operates as an integrated steel producer in Korea and internationally.

• POSCO Holdings is set to benefit from its strategic investments in electronic furnaces and overseas steel market growth, which could lead to improved revenue and cost efficiencies, enhancing net margins due to increased capacity and operational optimization.
  
• The Energy Materials business aims to capitalize on quality lithium asset acquisitions in South America and Australia, with plans to ramp up new plant operations ahead of schedule, potentially boosting revenue and earnings as demand stabilizes.
  
• The restructuring of low-performing businesses and the sale of nonessential assets is expected to enhance asset efficiency and generate additional cash flow, which can support future growth investments and improve overall financial performance.
  
• The stabilization of newly commissioned battery material plants and certifications from battery makers have laid the groundwork for future profit expansion. As operations stabilize, inventory valuation losses should decrease, leading to higher net income in the medium term.
  
• Cost innovation strategies in the steel industry, which focus on reducing production costs and enhancing value through premium products, are expected to maintain the POSCO Group's price competitiveness, thereby supporting revenue growth and improved earnings amid market challenges.

POSCO Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming POSCO Holdings's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.5% today to 3.0% in 3 years time.
• Analysts expect earnings to reach ₩2442.0 billion (and earnings per share of ₩37416.42) by about March 2028, up from ₩1094.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩2880.0 billion in earnings, and the most bearish expecting ₩2003.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.6x on those 2028 earnings, down from 23.6x today. This future PE is greater than the current PE for the US Metals and Mining industry at 10.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.71%, as per the Simply Wall St company report.

POSCO Holdings Future Earnings Per Share Growth

Risks

• Oversupply from China's steel market and recession in its construction industry could continue to suppress steel prices in Asia, negatively affecting POSCO's revenues and profit margins in the steel segment.
  
• Slow growth in the EV market and tumbling essential minerals prices have led to inventory value impairment, adversely impacting earnings in the Energy Materials business.
  
• High initial operation costs and low plant operation rates during the ramp-up phase of new facilities may result in short-term financial strain, impacting net margins and earnings.
  
• Global trade barriers and countervailing taxes, particularly in the steel sector, might impact POSCO's ability to maintain revenue from international markets.
  
• The need for restructuring and impairments from aging and low-profit assets could result in continued one-off expenses, potentially affecting overall profit and operational efficiency.

Valuation

• The analysts have a consensus price target of ₩348619.048 for POSCO Holdings 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 ₩500000.0, and the most bearish reporting a price target of just ₩225000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩81207.1 billion, earnings will come to ₩2442.0 billion, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 10.7%.
• Given the current share price of ₩312500.0, the analyst price target of ₩348619.05 is 10.4% higher.
• 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.