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POSCO International’s 2Q21 results beat consensus. Despite OP decline at its Myanmar gas field this year, we anticipate rapid improvement in terms of both P (selling price) and C (operation cost recovery) from 2H21. The firm’s 2021 OP is expected to grow 20% y-y on both steel sales increase and earnings improvement at affiliates.
Strong performance led by steel trading and invested affiliates; Myanmar gas field starting to recover
Accounting for two-thirds of POSCO International’s OP, the Myanmar gas field (2021E OP: W159.0bn, -48% y-y) should see rapid normalization from 2H21, despite negative structural factors (eg, decline in sales volume owing to the end of demand under a Take or Pay contract clause (Q), oil price downtrend in early-2020 (P), and delays in Myanmar gas field development project investment (C)), as oil prices strengthen and delayed projects resume.
We expect earnings at the trading division to remain strong into 2022 on POSCO’s integration of overseas export channels. With POSCO SPS’s motor core business beginning to show a healthy performance, the firm’s food business expanding, and palm-oil prices still robust, 2021 OP is anticipated to grow 20% y-y to W568.7bn, with earnings momentum likely appearing in earnest from 2H21 (2H21E OP: +40% y-y).
2Q21 review: Earnings growth momentum strengthens for non-Myanmar gas field business
POSCO International’s 2Q21 results surpassed the market projections, with sales of W8.52tn (+62% y-y) and OP of W170.0bn (+27% y-y).
The trading division (OP of W86.6bn, +120% y-y) led the strong earnings performance, helped by profitability improvement from increased steel sales volume and greater orders for construction project packages on POSCO’s continuing integration of overseas export channels. POSCO International affiliates (OP of W45.7bn, +614% y-y) also showed a healthy performance thanks to strong palm-oil prices in conjunction with beefed-up production, as well as greater sales at the motor core business.
Despite delays in the Myanmar gas field project in 2020 in the wake of Covid-19 and decreased sales (0.52bn ft3/day, -5% y-y) amid off-seasonality, 2Q21 OP (W37.7bn, -57% y-y) improved q-q for the Myanmar gas field on enhanced cost management since 3Q20 and a rebound in selling price (which lags behind oil prices).