Hyundai Glovis: Risk Resolved; Re-evaluation Starts

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The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com — Ed.

For Hyundai Glovis, worries towards overhang risk from the sale of majority shareholders’ stake have been resolved. In 2022, earnings improvement should continue on the back of increased transportation volume stemming from an uptick in finished car production. Currently, Hyundai Glovis shares are at a historically low level. Share price re-evaluation is expected thanks to the resolution of overhang risk.

Risk reduced thanks to stake sale by majority shareholders

On Jan 5, Hyundai Glovis majority shareholders (Mong-Koo Chung 6.71%, Eui-Sun Chung 3.29%) sold a 10% stake to Project Guardian Holdings for W163,000 per share (5.8% discount vs previous day’s closing price of W173,000). According to the shareholder agreement, the majority shareholders and Project Guardian Holdings are set as co-owners, and Project Guardian Holdings is given the right to appoint one director and request a joint sale (tag-along) if an additional stake is sold by the majority shareholders. It is judged that this block deal has put an end to overhang risks.

Considering earnings growth, valuation re-rating likely

Hyundai Motor Group (HMG)’s global car sales target for 2022 has been set at 7.47mn units (+12.1% y-y). Considering the low inventory levels of affiliates, parts transportation volume is likely to climb alongside a rise in production volume to match HMG’s sales target. Additionally, we note that at end-2021, Hyundai Glovis secured a finished car transportation contract with a non-captive client. Accordingly, the firm’s 2022 OP should top W1.23tn (+11.1% y-y), sustaining profit growth on an increase in transport volume for both parts and finished cars. If higher cost burden due to container freight rate hikes is successfully passed on to transportation rates, additional OPM increase is possible, centering on the distribution business division.

Hyundai Glovis is expected to report 4Q21 sales of W5.4tn (+11.1% y-y, +0.3% q-q) and OP of W309.2bn (+76.5% y-y, -1.8% q-q, OPM 5.7%). We estimate that favorable forex rates and strong freight rates made up for sluggish shipments of finished cars and parts caused by production disruptions. From 2Q22, top-line growth should accelerate alongside a meaningful rise in transportation volume.

Hyundai Glovis shares are trading at a 2022F P/E of 7.4x and P/B of 1.0x, sitting at the lower end of the historical valuation band. Previously, the firm had suffered valuation weakness due to overhang risks despite expectations for 2022 earnings improvement driven by greater car production. With the recent block deal putting such concerns to bed, share price re-rating is anticipated in line with forecasted earnings improvement.

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