GS Holdings shares may rebound on improved subsidiaries’ earnings in H2

2023.05.23 10:46:01 | 2023.05.23 12:27:21

GS Group headquarters in Seoul [Courtesy of GS]이미지 확대

GS Group headquarters in Seoul [Courtesy of GS]

Shares of GS Holdings Corp., the holding company of South Korean conglomerate GS Group, is expected to see a turnaround in the second half thanks to the expected performance improvement in its subsidiaries and a rebound from the historically low of the current stock price, according to analysts.

GS Holdings’ stock has lost 6 percent of its value so far this year, showing one of the most significant declines among major holding companies. The decline in stock price is believed to be a result of the unfavorable performance in the first quarter. GS Holdings reported a first-quarter revenue of 6.83 trillion won ($5.21 billion) with an operating profit of 1.06 trillion won, representing a 2 percent and 14 percent decline, respectively, from a year ago. Net profit dropped by 30 percent to 521 billion won.

The earnings decline can be attributed to low profitability of energy and power generation subsidiaries, which contribute the most to GS Group’s net profit. The net profits at unlisted subsidiaries such as GS Caltex, GS Energy, GS EPS and GS E&R are consolidated into GS Holdings’ revenue according to accounting regulations. GS Engineering & Construction Corp. operates independently from GS Group.

Energy and power generation subsidiaries experienced a rapid increase in performance last year due to the energy crisis caused by the Russia-Ukraine war. Oil companies benefited from rising oil prices, leading to improved inventory asset values and refining margins, while power generation companies achieved significant profits by raising electricity selling prices until the third quarter of last year. However, their performance are expected to be lackluster in the first half of this year due to the base effect, resulting in an overall slowdown in the group’s performance.

Analysts expect the current situation to persist until the second quarter. According to market tracker FnGuide, second-quarter revenue consensus for GS Holdings is 6.48 trillion won, down 11 percent from a year ago, with an operating profit of 689.5 billion won, down 55 percent.

“It is unlikely that the company’s operating profit will reach 1 trillion won in the second quarter. GS Holdings’ operating profit mainly relies on the power and energy sales of its subsidiaries, as well as the refining business of GS Caltex. But electricity prices and refining margins are expected to decline in the second quarter,” said Kim Hyun-tae, an analyst at BNK Investment & Securities Co.

However, from the second half of the year, there is a possibility that performance improvement will become more prominent as the base effect diminishes gradually. Increased demand for aviation fuel and other factors may lead to improved refining margins.

Furthermore, the recent decrease in stock valuation and the increased dividend yield are raising expectations for its stock price growth. According to Samsung Securities Co., GS Holdings’ estimated price-to-book ratio for this year is 0.27 times as of May 22, which is lower than the average of 0.79 times since 2004 and 0.38 times since 2019. The dividend yield is also historically high at 6.3 percent.

By Kang In-seon and Minu Kim

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