Korea’s POSCO making swift moves on restructuring

May 2014 goals are right on track.

It has been observed that Korea-based POSCO is making strides in achieving what the new CEO had stated in May 2014 as his goal – divesting non-core assets, improve efficiency and generate an operating profit margin of ~20%.

According to a research note from Nomura, along with this, it sees POSCO’s overseas steel business and non-steel segment improving in terms of earnings.

If Nomura sees any cyclical recovery – brought on by a series of positive macro news – the shares should re-rate further.

The report also noted that POSCO’s share catalysts are asset divestment, HRC volume and non-steel growth.

Here’s more from Nomura:

We see POSCO’s share catalyst as: 1) asset disposals worth KRW2tn by end-2015F, according to management; 2) volume growth via capacity expansion for hot rolled coil (+5.5% y-y); 3) our expected profit increase for its non-steel business (33% of 2014F EBIT) from the Myanmar gas project and LNG power plant additions; and 4) potential listing of subsidiaries, with POSCO Energy as the most likely candidate.

As part of the asset divestment, we believe the company is considering selling its FINEX No.1 plant, a 49% stake in the LNG terminal, and non-core assets owned by overseas subsidiaries, in our view.

2Q14 results: broadly in line. POSCO posted 2Q operating income of KRW839bn (+14.7% q-q, -7.0% y-y), broadly in line with consensus (KRW800bn) and our estimate (KRW798bn).

Valuation: TP maintained at KRW400,000. We maintain our TP of KRW400,000, which is based on FY15F P/E of 18.7x (reported EPS: KRW21,052).

This is now based on a 40% premium to 2009-13 mid-cycle P/E, whereas the previous method was based on FY14F P/BV 0.82x.