Daishin Securities raised its target price for HD Hyundai (267250.KS) to 410,000 won from 300,000 won, a 36.7% increase, citing higher net asset value (NAV) from rising share prices of listed subsidiaries and the potential for upward revision of brand royalty rates.
Daishin Securities maintained its "buy" rating on HD Hyundai and lifted the target price to 410,000 won on Tuesday. The brokerage said there is sufficient upside compared with the 269,500 won closing price on Friday. "The fruits of subsidiaries that have entered a mid- to long-term growth cycle are converging at the holding company," said Lee Kyung-yeon, an analyst at Daishin Securities.
The key factor is the recalculation of brand royalty rates. HD Hyundai's brand royalty contracts with its subsidiaries are set to expire at the end of this year. The current rate is 5 basis points, lower than the 30 basis points average among holding companies covered by Daishin Securities. If the rate rises during renegotiations, the holding company's operating value could expand accordingly, the analyst said.
First-quarter earnings also exceeded market expectations. HD Hyundai's first-quarter consolidated revenue was 19.6 trillion won, up 14.7% from a year earlier. Operating profit jumped 120.4% to 2.8 trillion won, marking the highest quarterly figure on record. The operating margin was 14.5%.
Earnings improvements were evident across subsidiaries. HD Hyundai Oilbank posted first-quarter revenue of 7.7 trillion won and operating profit of 933.5 billion won. HD Korea Shipbuilding & Offshore Engineering recorded revenue of 8.1 trillion won and operating profit of 1.4 trillion won. HD Hyundai Site Solution, HD Hyundai Electric and HD Hyundai Marine Solution posted operating profits of 207.5 billion won, 258.3 billion won and 93.4 billion won, respectively.
Daishin Securities views HD Hyundai Electric and HD Korea Shipbuilding & Offshore Engineering as the two pillars driving the holding company's value. The two account for 43% and 30% of HD Hyundai's NAV, respectively. Earnings improvements at subsidiaries flow through to the holding company's cash flow via dividends and brand royalties. The increased likelihood of HD Hyundai Oilbank resuming dividends amid a refining industry rebound was also cited as an additional source of funding.
Shareholder return expectations were highlighted as another investment point. HD Hyundai said in a conference call that there is no change to its existing target of an annual payout ratio of 70% or higher. The company also said it would review various options, including cancellation, for its 10.5% treasury stock holdings following the revision of the Commercial Act. Daishin Securities said dividend expansion and treasury stock cancellation are decisions in which the interests of the largest shareholder and general shareholders align.
Daishin Securities forecast HD Hyundai's revenue at 81.116 trillion won and operating profit at 6.867 trillion won for this year. Net profit attributable to controlling shareholders is projected at 3.095 trillion won. "It is a holding company like a comprehensive gift set, where the fruits of major growth industries converge," Lee said. "There is still ample room for potential shareholder value enhancement."
