On Friday, Macquarie downgraded Samsung (KS:005930) Engineering Co Ltd (028050:KS) stock to Neutral from its previous Outperform rating, significantly reducing the price target to KRW21,000 from KRW31,000. The adjustment follows a reassessment of the company's long-term return on equity (ROE) and operational performance expectations.
The firm's analyst cited a revised long-term ROE expectation of 12%, a decrease from the previously estimated 16%. This adjustment is due to a combination of factors including stagnant order intake, infrequent cost recoveries at the completion of projects, and an increase in fixed costs resulting from expanded engineering capacity. These elements are anticipated to yield an annual operating profit of approximately KRW655 billion for the next fiscal year, which is roughly 26% below the market consensus.
Despite an earnings beat in the third quarter of 2024, prompting an upward revision of the 2024 earnings per share (EPS) estimates by 19%, the analyst projected a downturn for the subsequent years. The EPS forecasts for 2025 and 2026 were reduced by 22% and 25%, respectively. The lowered expectations are attributed to slower revenue recognition from projects within the Samsung group and escalating costs.
The new price target reflects the updated earnings outlook, with the analyst pointing out the challenges faced by Samsung Engineering in maintaining profitability and managing costs. These factors are expected to impact the company's financial performance in the coming years.
Macquarie's revised stance on Samsung Engineering indicates caution regarding the company's near-term financial prospects, as reflected in the lowered earnings estimates and price target.
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