DL Group’s earnings could improve in Q2 from oversea plant business

DL Group logo [Courtesy of DL Group]

Local brokerage houses are projecting earnings at units of DL Group could improve in the second half from high-margin overseas plant projects and high value-added chemical sectors after suffering from lackluster performance in such industries as chemical and construction.

According to the Korea Exchange on Monday, shares of DL Holdings Co., the holding company of DL Group, has fallen 13 percent this year. DL Holdings shares closed at 49,950 won ($37.74) on Monday, down from the 57,000 won range at the beginning of the year.

The decline in DL Holdings shares is largely attributable to a portfolio concentrated in industries such as chemical and construction. At the end of last year, DL Holdings owned a 23 percent stake in DL E&C Co. and a 64 percent stake in DL Construction Co., two listed companies that engage in providing construction. The holding company also owns an 88 percent stake and a 70 percent stake in two unlisted companies, DL Chemical Co. and DL Energy Co., respectively.

According to regulatory filing, DL E&C recorded 1.85 trillion won in sales in the first quarter, up 22 percent from the same period last year, and 90.1 billion won in operating profit, which is down 28 percent. It seems that the local housing market, which has been sluggish since last year, is undermining the construction company’s performance.

However, market analysts are paying attention to the fact that its plant division, which has a high profit margin, is improving. The rate of cost to sales at DL E&C’s plant division is in the lower 80 percent range, which is low compared with other business sectors such as construction, which are in the lower to mid- 90 percent rage, according to sources from Hanwha Investment & Securities Co.

“The rate of cost to sales in the domestic housing construction market, which was the main focus of DL E&C, will be high at around 90 percent throughout the year, but DL E&C is expected to see profitability stabilize by securing large-scale orders from non-housing sectors,” said an analyst at Daishin Securities Co., adding that since DL E&C has no risk related to a project financing guarantee in the housing market, there is no corporate value discount factor if only its medium-term earnings growth is confirmed.

DL E&C Co. logo [Courtesy of DL E&C]

Reflecting this expectation, DL E&C shares has risen 11% over the past month, while DL Holdings shares fell 2 percent during the same period. DL E&C was incorporated as a major affiliate of DL Group in 2021 when the group switched to a holding company system.

DL Group, meanwhile, is seeking business expansion in its affiliates other than those in the construction sector, through mergers and acquisitions. DL Chemical, the petrochemical unit, acquired Kraton Corp., a U.S. producer of high value-added chemical materials, in 2021 to reorganize its portfolio centered on traditional petrochemical products, such as polyethylene and polybutene.

DL Energy, the power plant business unit, acquired a U.S. power generation company in the third quarter of last year to generate growth. In particular, the company’s earnings increased significantly last year as electricity prices rose due to rising oil prices, offsetting the earnings declines in other affiliates.

Market analysts expect DL Holding’s earnings to improve this year thanks to growth in demand for overseas power plants and expectations for improved performance in the chemical and energy sectors. According to market data tracker FnGuide, DL Holdings is expected to post sales of 5.48 trillion won and operating profit 356.5 billion won this year. The figures represent an increase of 5.8 percent and 27 percent, respectively, compared with the previous year.

There are concerns, however, that falling energy prices this year could negatively affect DL Energy’s performance and that a rebound may be delayed in the chemical industry. If the domestic housing sector, which accounts for 30 percent of sales at DL E&C, further slows, it is expected to negatively affect shares of the company.