POSCO Holdings (NYSE:PKX) is a South Korean conglomerate encompassing steel, chemicals, construction, and trade businesses. While steelmaking remains its core activity, PKX is strategically repositioning itself toward becoming a future-proof, eco-friendly materials provider.
Through its Future M business segment, for instance, PKX manufactures anode and cathode materials, two of the main components of EV batteries. Their customers include Korea’s leading EV battery manufacturers such as LG, Samsung, and SK.
PKX started trading on the NYSE decades ago in the 90s. However, despite having reached an all-time high of $185 in 2007 just before the financial crisis, share performance has been choppy since. All-time return stands at 109%, which, if we consider the volatility and duration, is subpar.
In recent times, there have been some renewed interests in the stock, given PKX’s strategic shift to become a green material producer to capture two major secular growth trends: the surge in renewable energy and electric vehicle (EV) adoption. Despite the weak macro environment, PKX has delivered a 1-year price return of 24% and a 5-year price return of 29%.
I initiate my coverage with a neutral rating. My price target of $72 implies a discount of over 12% from the trading price, suggesting an overvaluation.
However, I believe that PKX could be an interesting long-term investment opportunity at the right price. I would advise investors to watch near-term price actions to identify better entry points.
I would expect the still weak macro environment at present, especially in China, to challenge revenue growth and earnings for the core steel-exporting business for the foreseeable future. As of last year, steel exports made up 59% of PKX’s revenue, while China alone accounted for 24.9% of PKX’s total export sales revenue.
Revenue has declined by 11% in FY 2023 due to the challenging macro environment, especially in China – its core export market. Operating profit has also been in downward trend since the past two years.
In Q4, PKX declared a 2023 – 2025 shareholder return policy consisting of base dividend per share / DPS of 10,000 KRW ($7.42). Given the downward DPS trend over the past two years, the potential earnings decline into 2024 also presents a risk of flat dividend growth.
Likewise, I believe that PKX’s TTM 25.5x P/E ratio is currently at an elevated level despite the challenging macro environment that is pressuring revenue and earnings growth at present. With no signs of global recovery just yet, PKX is at a higher risk of correction at the current valuation, in my opinion.
Shorter-term, I would expect the management to be able to curb higher earnings decline with cost and pricing optimization efforts to battle demand uncertainty, especially in its steel business.
Despite the double-digit decline in revenue in FY 2023, operating margin saw a much softer decline of -1.1%, even if compared to the decline in FY 2022 (-6.4%).
PKX appears to have a proven framework to optimize its profit margin, which entails activities such as fixed cost reduction, pursuing synergies among subsidiaries, and increasing sales of higher value-added products, among many others. Furthermore, as a conglomerate with a sizable production scale, PKX remains in a good position to optimize production costs.
Longer-term, I expect revenue from Future M business to continue increasing its share in the overall revenue mix of PKX, effectively reaccelerating top-line growth and also margin expansion.
Despite the weak macro situation that slows down the growth rate in EV demand, I still expect an upward trend in EV demand overall. With a potential reacceleration of EV demand beyond FY 2024, I project higher revenue growth for Future M, driven by demand for EV battery-related materials from both existing and new customers.
Future M has been the fastest-growing business for PKX. In FY 2023, Future M grew its revenue by over 44% and had over 6% share of PKX’s overall revenue mix, up from just 3.8% in FY 2022. With the long-term target of $32 billion of sales for Future M in 2030, I would project Future M to make up over half of the business by 2030.
One apparent issue affecting Future M’s operating margin over the past year has been the global Lithium price crash, which forced a recognition of inventory valuation loss of KRW 75 billion ( $56 million). In absent of that, Future M’s operating margin would have been somewhere at 2% instead of 0.8%. Nonetheless, PKX has been working towards solving that issue by launching major critical battery material mining projects, which should expand operating margins longer term, through vertical integration.
PKX will focus on the production of Lithium Hydroxide and Carbonate, as well as Nickel, in under-construction overseas plants in Argentina and Indonesia, which should allow PKX to secure a steady and sizable supply of critical minerals for battery-related materials and to have greater control over their pricing.
Valuation / Pricing
My 1-year target price for PKX is driven by the following assumptions for the bull vs. bear scenarios:
Bull scenario (50% probability) assumptions – I project PKX to deliver FY 2024 EPS of $4, implying soft decline in earnings. I assign PKX a forward P/S of 25, the level of where it is trading on a TTM basis, which should enable PKX to reach a forward price of $100 per share, pretty much revisiting the path to its 1-year high of $131 in July last year in this scenario.
Bear scenario (50% probability) assumptions – I project PKX to deliver FY 2024 EPS of $2.5, reflecting the challenge in curbing earnings decline. I expect a major correction to $45, closer to its FY 2022’s low. Accordingly, I expect P/E to remain at 18x, the level where PKX is trading today at price level of $83.
Consolidating all the information above into my model, I arrived at an FY 2024 weighted target price of $72.5 per share, an implied 12% discount from the current price level of $80. I give the stock a neutral rating.
In my opinion, while PKX may present an attractive long-term investment opportunity, it appears overvalued at this time. There may be a better entry point within the next few months, since the minimal signs of economic recovery may create a correction.
PKX is a South Korean conglomerate that is strategically repositioning itself towards becoming a future-proof, eco-friendly materials provider. The company’s Future M business segment manufactures anode and cathode materials, two of the main components of EV batteries. Overall, PKX is an interesting long-term investment opportunity, but the stock appears overvalued today. Interested investors should watch near-term price actions to identify better entry points.
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