New Partnerships And Long-Term LNG Deals Will Support Future Expansion

Key Takeaways

• Strategic partnerships and expansions in emerging markets and renewable sectors could drive revenue growth through increased market demand.
  
• Restructuring and focus on high-margin businesses aim to free up capital and enhance net margins despite economic uncertainties.
  
• Economic challenges and complex projects may pressure Posco's profitability and margins, amid declining raw material prices and geopolitical uncertainties.

Catalysts

An integrated business company, operates in trade, resources, and infrastructure development/operation businesses.

• The joint venture with JSW Group to build an integrated steel mill in India is a strategic move to tap into the rapidly growing Indian steel market, potentially increasing future revenue from premium automotive steel products.
  
• The expansion into the rechargeable battery materials and renewable energy sectors, in collaboration with JSW Group, could result in growth in revenue and earnings by capitalizing on the rising demand for EV-related materials and renewable energy solutions.
  
• The completion of lithium production plants, such as the Posco Argentina's brine lithium Phase 1 and the ongoing Phase 2, positions the company for increased production capacity and efficiency, which could improve net margins and earnings over time as market conditions stabilize.
  
• Restructuring efforts, including the disposal of low-margin businesses and noncore assets, are expected to free up capital, improve operational efficiencies, and enhance net margins through more focused investments in high-growth, high-margin business areas.
  
• Anticipated declines in raw material prices could improve manufacturing costs and net margins in future quarters, although challenges remain due to geopolitical and economic uncertainties impacting selling prices and demand.

Posco International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Posco International's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 2.4% in 3 years time.
• Analysts expect earnings to reach ₩870.5 billion (and earnings per share of ₩4712.54) by about September 2028, up from ₩437.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩970.0 billion in earnings, and the most bearish expecting ₩623.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.7x on those 2028 earnings, down from 18.9x today. This future PE is greater than the current PE for the KR Trade Distributors industry at 9.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.85%, as per the Simply Wall St company report.

Posco International Future Earnings Per Share Growth

Risks

• Declining prices for key raw materials like lithium hydroxide pose challenges to profitability, potentially impacting Posco's net margins negatively.
  
• Initial costs associated with new lithium production plants and the ramp-up phase may result in increased expenditures, which could affect net earnings in the short term.
  
• The steel market faces sluggish demand, particularly due to economic downturns in China, which could lead to pressure on Posco's operating profit margins.
  
• The complex partnership and significant investments needed for the new integrated steel mill in India may strain financial resources and introduce execution risks, potentially affecting future revenue growth and profitability.
  
• The global economic environment and geopolitical risks, such as protectionist trade tendencies, may lead to uncertainties in revenue streams and affect expected market expansions.

Valuation

• The analysts have a consensus price target of ₩64428.571 for Posco International 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 ₩75000.0, and the most bearish reporting a price target of just ₩59000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩36389.7 billion, earnings will come to ₩870.5 billion, and it would be trading on a PE ratio of 16.7x, assuming you use a discount rate of 9.8%.
• Given the current share price of ₩48500.0, the analyst price target of ₩64428.57 is 24.7% 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.