Despite setbacks in finished car production, Glovis’s earnings are being buoyed by rising non-vehicle logistics, favorable forex rates, and high freight rates. The energy transportation business, which is set to become a new growth engine, is also gaining visibility. We expect the firm’s valuations to recover over the /long term.
Valuations to rise as visibility of energy shipping business increases
We maintain a Buy rating and TP of W265,000 on Hyundai Glovis. Despite a decline in transportation volume amid production disruptions at finished carmakers, revisions to our earnings forecasts remain limited thanks to: 1) favorable forex rates; and 2) greater sales at non-automotive transportation businesses. The firm is experiencing valuation re-rating as it transforms itself from a car carrier into a comprehensive transportation play (including energy (LNG, hydrogen) shipping) by signing shipping contracts with global energy giants. Over the long term, we expect to see favorable changes in shareholder return policy, including dividend expansion.
Recently, Glovis signed a 10-year LNG shipping deal with the Australian energy company Woodside, with an option to extend the contract by 5 years. Under the contract, Glovis will start its Australian LNG transportation business from 2H24. Over the /long term, the firm hopes to expand its business scope to include offshore distribution of liquid hydrogen. Also, after signing a contract with the Swiss commodities trading giant Trafigura in Sep 2021 for ocean transportation of ammonia and LPG from 2024, Glovis placed orders for two very large gas carriers (VLGCs). The company continues to strive to secure new growth engines, with the ocean transport division planning to start gas shipping from 2024, in addition to bulk (commodities and crude oil) and pure car carrier (PCC) shipping.
1Q22 preview: Favorable forex rates and sound earnings at ocean transportation division to offset decreased CKD volume
We forecast 1Q22 sales of W5,497.5bn (+8.5% y-y) and OP of W318.6bn (+52.2% y-y; OPM of 5.8%). As was the case in 4Q21, lackluster finished car and parts shipments caused by production disruptions were likely offset by favorable forex rates, sound /parts logistics, and strong freight rates.
Glovis is trading at a 2022E P/E of 7.9x and P/B of 1.1x. Uncertainties linger over an increase in trade volume led by a rebound in finished car production, which has been disrupted by global supply chain bottlenecks and chip supply shortages. But, it is welcome that /parts logistics are expanding and the firm is striving to secure new growth engines via new business ventures, including the distribution of hydrogen and overseas distribution of used cars.
