Analysts downgrade GS E&C’s outlook following disappointing Q3 results

A construction site for GS E&C’s new apartment complex in Incheon’s Geomdan area. [Photo by Yonhap]

Analysts lowered their target prices for GS Engineering & Construction Corp on Tuesday, as the company’s third-quarter performance fell below market expectations and forecast grim profitability improvement in the near term due to increased costs from on-site inspections.

According to an analysis by EBest Investment & Securities Co., GS E&C’s third-quarter operating profit was 60.2 billion won ($45 million), significantly lower than the consensus of 123.3 billion won, marking an earnings shock.

“Following the reflection of costs related to the collapse at the construction site for GS E&C’s new apartment complex in Incheon’s Geomdan area in the second quarter, inspections by the business site caused an increase in safety-related costs, leading to a deterioration in housing margins,” EBest Investment & Securities analyst Kim Se-ryeon explained.

“Out of a total of 83 sites, 15 sites adjusted their estimated costs upward due to the reflection of safety costs. If the estimated costs of the remaining sites are also adjusted, it will not be easy for the margin to improve until the first half of 2024,” Kim added. EBest adjusted the target price for GS E&C down to 15,000 won from 16,000 won, based on an estimate of the company’s operating loss this year at 124 billion won, compared to a profit of 555 billion won last year.

Daishin Securities Co. also lowered the constructor’s target stock price to 14,000 won from 16,000 won. “After the Geomdan accident, the estimated costs were adjusted upward at 15 sites, worsening the construction/housing cost rate,” analyst Lee Tae-hwan said, adding, “Poor performance and an increase in safety management costs” are other contributors to the company’s earnings shock.

“Considering that a conservative cost reflection and higher safety costs will continue for the time being, and given that construction/housing accounts for more than 70 percent of total sales, an improvement in profitability is fairly grim,” Lee concluded.

Samsung Securities Co. also lowered the company’s target stock price to 15,000 won from 16,000 won. Analyst Baek Je-seung explained the target price downgrade by stating that “despite the expected housing sales recovery in the fourth quarter, cost rate stabilization is expected to take more time,” leading to the 2024 operating profit estimate being revised downward by 12 percent from the previous estimate to 516 billion won.

Daol Investment & Securities Co. also lowered its target stock price for GS E&C to 15,000 won from 24,000 won, HI Investment & Securities Co. to 15,000 won from 16,000 won, and Meritz Securities Co. to 19,000 won from 23,000 won.

Hyundai Motor Securities Co., however, maintained the target stock price for the company at 16,000 won while adjusting its investment opinion to “buy” from “market perform,” given that concerns about poor performance “have already been adequately reflected in the low share price.”

GS E&C closed at 13,320 won on Monday, up 0.53 percent from the previous trading day.