Cash-rich Hyundai Engineering makes case for IPO at W10tr valuation: analysis

South Korean builder Hyundai Engineering’s anticipated initial public offering will bring its equity value to over 10 trillion won ($8.5 billion), as its market debut plan is considered a critical step for a full-fledged family business succession in Hyundai Motor Group.

A booming housing construction market coupled with its net cash -- amounting to 2.3 trillion won as of end-June -- make the case for the 10 trillion-won mark in equity value of the company, analysts said.

The company, dedicated to the engineering services of chemicals and power plants, infrastructure and housing construction, will use its abundant cash to carry out dividend payouts and accelerate its push for a new field of business, noted Sally Kim, an analyst at eBest Investment & Securities.

“The larger cash reserves translate into a higher chance to win lucrative construction projects,” Kim wrote to investors, adding the cash-rich Hyundai Engineering is likely to gain an upper hand in the industry where it is normal to take out financial leverage to win orders.

Kim added that Hyundai Engineering, which owns housing franchise Hillstate, will see a rebound in profitability as more housing projects undertaken by the company are materializing. This, Kim said, will offset the decelerating pace of growth in its overseas plant construction business.

Hyundai Engineering plans to apply for a listing in the near future to the stock market operator, the Korea Exchange, as its latest financial report was audited by accounting firm Ernst & Young Han Young upon the request of financial authorities.

The IPO is expected to speed up Hyundai Motor Group Chairman Chung Euisun’s plan to exercise control over the nation’s second-largest conglomerate by increasing his stake in the group’s de facto holding company, Hyundai Mobis.

Chung owns an 11.72 percent stake in Hyundai Engineering, making him the second-largest shareholder behind only Hyundai Engineering & Construction with 38.62 percent ownership. Other major shareholders in Hyundai Engineering include Hyundai Glovis, Kia and Hyundai Mobis.

The succession plan will not only consolidate Chung’s groupwide control, but also allow Hyundai Motor Group to dissolve its cross-shareholding system under which Hyundai Mobis’ indirect affiliate Kia is currently its largest shareholder.

According to Kim’s estimate, Hyundai Engineering's projected earnings before interest, taxes, depreciation and amortization (EBITDA), a popular gauge of a company’s performance, will stand at 465 billion won by 2021 and 843 billion won by 2023, on the back of the domestic housing construction projects.

Its EBITDA, 679 billion won in 2018, fell to 387 billion won in 2020, while its operating profit fell 36.6 percent on-year to 258.7 billion won.

“Since (Hyundai Engineering’s) merger with Hyundai Amco, the company has aggressively secured housing project orders, laying the groundwork for a new source of income,” Kim wrote.

In the meantime, the company’s shareholders on Thursday nodded a 10-to-1 stock split in an extraordinary meeting, in a move to set the share price to a more popular trading price before it goes public.

Hyundai Engineering in May selected Mirae Asset Securities, KB Securities and Goldman Sachs as underwriters of the IPO.

By Son Ji-hyoung (consnow@heraldcorp.com)