Construction stocks fall to 52-week low on sluggish property market

Hyundai E&C Co. headquarters [Courtesy of Hyundai E&C]

Stock prices of South Korean construction companies have plunged to a 52-week low in July as the sluggish real estate market and accidents at construction sites dampened investor sentiment.

According to the Korea Exchange on Tuesday, shares of GS Engineering & Construction Corp. (GS E&C) plummeted 22.42 percent in July, and those of DL E&C Co. 10.65 percent and Hyundai E&C Co. 4.2 percent.

The stock price of HDC Hyundai Development Co. reached a 52-week low this month after losing 4.48 percent and Daewoo E&C Co. 4.55 percent.

Investor sentiment turned weak after the results of the investigation into the collapse of an apartment building in Gumdan, Incheon, was revealed last week.

GS E&C, which was responsible for the construction, disclosed that it reflected a 550 billion won ($426.3 million) in losses following its decision to rebuild the apartment.

“The comprehensive inspection results of 83 GS E&C construction sites in August may have a negative impact on the whole industry,” said Kim Seung-jun, an analyst at Hana Securities Co. “It could be costly if the incident escalates into an industry-wide practice issue rather than an individual company issue.”

The sluggish housing market is also weighing on the stock prices.

According to KB Securities Co., the total supply of housing by the five major listed construction companies amounted to 19,000 units in the first half of the year, which is only 21.1 percent of the annual target of 88,000 units.

“The low supply is attributed to the difficulty in determining the timing of supply due to the increase in construction costs and the real estate market slump,” said Jang Moon-jun, an analyst at KB Securities. “We expect some companies to lower their supply targets in the second half of the year.”

Brokerage houses predict that the housing market is unlikely to improve significantly in the second half of the year.

“Although the number of unsold units appears to have decreased, domestic housing indicators are still not good as the number of units sold has halved,” said an unnamed official from Hana Securities Co.

The series of negative factors has pushed construction companies further down.

According to market data tracker FnGuide Inc., DL E&C has a price-to-book ratio (PBR) of 0.29 times based on this year‘s estimated earnings. The company’s market capitalization is less than half of its book value.

Most construction companies are in a similar situation, including Daewoo E&C (0.4 times), Hyundai E&C (0.49 times), and HDC Hyundai Development (0.23 times).

Some construction companies have a cash asset size that is comparable to their market capitalization.

According to the Korea Investment & Securities Co., DL E&C’s market cap has declined to 1.1 times the net cash held by the company as of the first quarter of this year. Hyundai E&C ’s market cap is at around 1.4 times its net cash.

Brokerage houses advised investors to pay attention to construction companies that have a low proportion of the housing business and have strengths in new businesses and overseas orders.

According to Yuanta Securities Co., Hyundai E&C, for example, is expected to see overseas orders this year surpass its annual target of 10.5 trillion won on the back of projects such as the Amirah project in Saudi Arabia.

“Hyundai E&C is expected to have a clear track record of overseas orders,” said Kim Ki-ryong, an analyst at Yuanta Securities.

Daewoo E&C is also in a favorable situation.

“Given the company’s ordering strategy that focuses on base countries such as Nigeria and Iraq, there is a possibility of securing additional orders in the nuclear power plant sector,” Kim said. “The promotion of development projects in Vietnam are expected to continue.”