Hyundai Autoever: Earnings Remain Solid; Mid/long-term Earnings Growth Expected
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. — Ed.
Amid the spread of Covid-19, the execution of new SI projects is expected to be delayed until 1H20. However, as half of Hyundai Autoever’s sales come from recurring IT outsourcing services, strong earnings are anticipated in the near term. We believe that expectations for healthy mid/long-term earnings remain valid, favorably viewing the firm’s strategic growth business amid clients’ accelerating digital transformation.
Strong earnings expected over near term; to benefit from digital transformation over mid/long term
Hyundai Autoever’s fundamentals appear relatively solid. While new system integration (SI) projects may be delayed amid Covid-19, IT outsourcing services (account for about 55% of overall sales) remain essential to the firm’s clients, as they are key to sustaining stable business performances. And, given that the company’s non-captive client portion is only 5%, its earnings volatility should remain minimal.
Once the Covid-19 crisis eases, digital transformation (the building of non-face-to-face economic infrastructure) is to further accelerate. Following the Samsung Group, LG and SK group companies are targeting a transition towards cloud-based operating systems within two years. Going forward, the utilization of cloud-based solutions is to become widespread in both the private and public sectors. Over the mid/long term, Hyundai Autoever should enjoy strengthening earnings growth and margin improvement, backed by a higher sales contribution from its strategic businesses, including the Global One-IT, smart factory, smart building/home, and smart mobility domains.
1Q20 results: Earnings fall slightly short of our estimates
Hyundai Autoever booked 1Q20 sales of W329.0bn (+7% y-y) and OP of W11.4bn (-3% y-y), with OP coming in slightly below our estimate.
The SI division posted sales of W146.8bn (-3% y-y), showing a y-y slowdown due to delayed SI projects in China amid Covid-19. Meanwhile, the ITO division reported robust earnings growth, offsetting sluggish results at the SI division, with sales of W182.3bn (+17% y-y) led by: 1) the integration of Hyundai Mobis’s IT personnel; and 2) increased system operations at Kia Motors’ new India facility. However, weighed upon by greater: 1) fixed-cost burden due to low-seasonality; and 2) R&D/depreciation and amortization costs, the firm booked somewhat tepid OP (OPM of 3.5%, -0.3%p y-y).
Hyundai Autoever is expected to display 2Q20 OP of W22.2bn (-3% y-y), with strong earnings growth at the ITO division thanks to the integration of IT personnel from both domestic and overseas affiliates offsetting an anticipated slowdown in earnings growth at the SI division due to Covid-19.