Hyundai E&C shares halved from April peak, but analysts still say 'buy'

Shares of Hyundai E&C, which had climbed to nearly 200,000 won ($134) in April, have been pushed back to around 100,000 won in just three months, as concerns over delays in key project contracts triggered a sharp selloff following a rally driven by nuclear power plant contract expectations.

Brokerages have been cutting their target prices in quick succession — yet they are still recommending investors buy the stock. The prevailing view is that the timing of the overseas nuclear contracts the market has been waiting for has simply been pushed back, while the likelihood of winning those contracts and Hyundai E&C's underlying competitiveness remain unchanged.

According to Korea Exchange data, Hyundai E&C shares hit an intraday high of 198,400 won in April before reversing course and closing at 101,400 won on Wednesday. With the stock having dipped into the 90,000-won range during intraday trading recently, the shares have in effect been cut nearly in half.

The decline over just the past month alone exceeds 30 percent. Research notes from Mirae Asset Securities and Shinhan Investment show that as of Wednesday, the stock's one-month return stood at minus 30.1 percent, while its three-month return reached roughly minus 43 percent.

Analysts say the sharp rise in the share price on nuclear contract expectations made the disappointment selling all the more intense once contract timelines began slipping.

Target prices have been revised down accordingly. Mirae Asset Securities cut its target for Hyundai E&C by 18 percent, from 213,000 won to 175,000 won. Shinhan Investment trimmed its target by 6 percent, from 180,000 won to 170,000 won.

Both brokerages, however, kept their buy recommendations. While the reasons for the target cuts differ slightly, neither firm views the fundamental value of the nuclear business as having been impaired. The lower targets reflect the later-than-expected contract timeline and a higher required rate of return from the market — not a judgment that the nuclear contracts will fall through.

The main reason brokerages are holding to their buy calls is Hyundai E&C's overseas nuclear pipeline. Key projects the company is pursuing include the Palisades small modular reactor (SMR) with Holtec International in the United States, a large nuclear power plant with Fermi America in the US, and the Kozloduy nuclear power plant in Bulgaria.

Shinhan Investment expects the Palisades SMR contract to be split into two separate awards spanning the third and fourth quarters. The schedule has slipped from what the market originally anticipated, but the possibility of a contract has not disappeared, the brokerage said. The Fermi nuclear plant project in Texas is also a key anticipated contract.

Analysts also assess the earnings trajectory of Hyundai E&C's existing construction business as solid. Mirae Asset Securities estimates the company's second-quarter consolidated sales at 6.84 trillion won and operating profit at 245.5 billion won — roughly 22 percent above the market consensus of 200.5 billion won.

Shinhan Investment projected second-quarter sales of 6.76 trillion won and operating profit of 247.5 billion won, which it said would come in 23.4 percent above consensus. While the two firms' detailed estimates differ somewhat, both agree that second-quarter operating profit will land in the mid-to-high 240 billion won range, well ahead of market expectations.

The brokerage community's read on Hyundai E&C is relatively clear: earnings are improving on the back of a recovery in the housing and plant divisions, but the variable that will ultimately determine the direction of the share price is whether the company secures overseas nuclear contracts.

"The possibility of overseas nuclear results remains valid despite the delay," said Kim Ki-ryong, an analyst at Mirae Asset Securities, adding that the firm maintains its buy rating and top-pick designation. Kim Seon-mi, an analyst at Shinhan Investment, said, "Despite solid earnings and contract wins, as the leading nuclear-sector stock, the share price is driven by the pace of progress in the nuclear business," adding that she expects the stock to turn higher from the fourth quarter onward.