Summary in seconds
I continue to rate POSCO Holdings Inc. (NYSE: PKX) [005490:KS] stock as Hold.
I discussed PKX’s diversification efforts to grow the company’s non-steel businesses in my previous June 20, 2022 stock update. With this current article, I write about POSCO’s corporate actions and business outlook.
On the one hand, the planned merger of POSCO Energy and POSCO International will help PKX’s business diversification efforts, while the recent cancellation of its own shares sends a strong signal about POSCO Holdings’ commitment to capital return. shareholders. On the other hand, PKX’s business outlook for the 2nd half of 2022 is unfavorable, with the expected drop in steel prices being a major headwind. Considering the positives and negatives associated with the stock, I choose to maintain a neutral opinion or a holding rating for POSCO Holdings.
Plan to merge the two commercial subsidiaries of the company
Korean news publication Korea time reported on August 12, 2022 that “POSCO Holdings’ business arm, POSCO International” is merging “with its power generation unit, POSCO Energy”.
Currently, POSCO Holdings owns 89.0% and 62.9% of the outstanding shares of POSCO Energy and POSCO International, respectively. Assuming the merger between POSCO International and POSCO Energy is completed as planned in January 2023, POSCO Holdings will then own a 70.7% stake in the merged entity, the “new” POSCO International.
This specific corporate action will have a positive impact on POSCO Holdings’ plans to diversify beyond its core steel business. In my previous June 20, 2022 article for PKX, I pointed out that POSCO Holdings’ goal is to have “non-steel businesses” contribute “half (vs. 20% currently) of operating profit business by 2030”. The proposed merger between POSCO Energy and POSCO International is expected to boost POSCO Holdings’ efforts to expand into LNG or liquefied natural gas.
According to its corporate website, POSCO Energy operates the “first independent LNG terminal” (Gwangyang LNG Terminal) in South Korea, and has an “LNG combined cycle power generation” capacity of 3,412 MW. On the other hand, POSCO International notes on the company’s website that it is “constantly expanding its business across the entire gas value chain, including liquefaction plants, LNG trading, bunkering, reception, pipelines and independent power producers (IPPs)”. In other words, POSCO International has good reason to create an integrated LNG company by bringing together its two LNG-related business subsidiaries through a merger.
Apart from business diversification, return on shareholders’ capital is another crucial issue that investors focus on. In the next section of this article, I highlight a key corporate deal recently initiated by POSCO Holdings regarding return on capital.
Cancellation of own shares
A press article from August 12, 2022 published by Yonhap News Agency mentioned that POSCO Holdings “has decided to cancel 672 billion won ($517 million) of its shares”, or more precisely “2.61 million treasury shares” which “represent approximately 3% of its total issued shares “.
This specific corporate action is important for three main reasons.
First, it is not customary for Korean listed companies to cancel their own shares following share buybacks. Based on a May 7, 2017 Yonhap News Agency According to a news commentary, “equity cancellations by listed manufacturing companies” in South Korea accounted for only “2.3% of share buybacks, resales and retirements” based on from a study of “7,428 manufacturing companies” over the period 2004-2015. This implies that PKX’s decision to cancel treasury stock and reduce the company’s stock count as part of shareholder capital return initiatives is a notable exception.
Second, treasury stock cancellations are not something POSCO Holdings does on a regular basis. In fact, the last time PKX canceled the company’s cash years was in 2004, which is over 18 years ago.
Third, the recent POSCO Holdings treasury cancellation action should be viewed in the context of the company’s overall plans to return capital to shareholders. Along with announcing the cancellation of its treasury shares, PKX also disclosed that it will distribute a dividend per share of KRW 4,000 for the second quarter of 2022. This means POSCO Holdings’ dividend payout has increased from 7 000 KRW per share as of 1H 2021. to 8,000 KRW per share for the first half of 2022. In summary, POSCO Holdings clearly intends to return a greater proportion of the excess capital to its shareholders, as evidenced by the recent cancellation of the own shares of the company and the increase in dividends.
Moving away from corporate actions, I discuss PKX’s short-term trading outlook in the next section.
Outlook for the second half of 2022
Current market expectations for POSCO Holdings, as reflected in consensus financial estimates, indicate that the company’s results in the 2nd half of 2022 are expected to be worse than its performance in the 2nd quarter of 2022.
According to consensus figures from S&P Capital IQ, POSCO Holdings’ revenue growth on an annual basis is expected to moderate from +28.0% in the second quarter of 2022 to +11.3% and +8.3% for the third and fourth quarters of the year ongoing, respectively. In addition, PKX’s normalized earnings per share or EPS decline year on year is expected to decline from -12.1% in Q2 2022 to -56.5% and -29.9% in Q3 2022 and Q4. 2022, respectively.
In my opinion, the consensus estimates on the sell side are realistic. PKX’s core steel business is expected to underperform in 2H 2022 due to lower steel prices, which will weigh on the company’s overall financial performance in the second half of the year.
In its previous second quarter 2022 earnings briefing on July 21, 2022, POSCO Holdings noted that “the biggest variable that impacts the price (of Korean steel) is the price (of Korean steel). ‘steel) chinese’. Steel prices in China are expected to remain depressed in 2H 2022, which will hurt POSCO Holdings’ steel business segment. A research comment from August 11, 2022 posted by S&P Global Commodities Outlook pointed out that “China’s domestic demand for structural steel is expected to remain weak for the remainder of 2022” based on conversations with “market participants.”
My Hold rating for POSCO Holdings remains unchanged. I have a favorable view of PKX’s recent corporate actions, but the company’s financial performance is expected to deteriorate in the second half of 2022, which will cap PKX’s upside potential in the near term.