By David Englander
For years, Posco (005490.SE), the large Korean steel maker, has
struggled along with the rest of the industry, as an oversupply of
steel has flooded the market. That has weighed on steel selling
prices, and depressed profits.
Posco's shares have steadily declined since 2010, and are down
10% this year. At a recent 296,500 won, they trade for a rock
bottom 0.6 times book value.
But recent results suggest that a turn could be at hand, and
oversupply is easing. That could position the stock for big
gains.
In the September quarter, Posco's operating profit per ton rose
37% from the year ago period, marking the fourth consecutive
quarter of higher profitability. Lower iron ore prices are driving
the improvement. Their declines have far outpaced the drop in steel
prices, and have led to better margins. In the quarter, the selling
price of carbon steel fell only about 3%, compared to a 14% drop in
iron ore costs.
In a report, Moonsun Choi of Korea Investment & Securities,
attributes the wider spread to "an easing oversupply of steel
products," and believes the trend has legs. He estimates operating
profit will rise 13% this year, and 20% in 2015.
Choi sees big upside for the stock, valuing it at KRW500,000,
more than 60% above its recent price. At that level, the shares
would trade for 0.9 times his estimated 2015 book value.
The world's fifth largest steel maker, Posco sells 38 million
tons of steel a year. It sells about half its steel in Korea, and
the rest throughout the world, with China representing its second
largest market. Posco's American depository shares trade under the
symbol PKX.
Choi expects earnings to double in 2015, to KRW35,282 a share,
as Posco benefits from a more benign steel environment. This year,
earnings could come in at KRW 17,711 a share, on revenue of KRW65.6
trillion.
Restructuring should also drive improvements. CEO Kwon Oh-joon,
who was named to the top job in March, aims to remake Posco into a
leaner, more profitable company. Disposing of non-core assets is a
key part of the strategy, and is already underway.
In October, Posco sold three department stores in Korea and
Vietnam to the Lotte Group for KRW150 billion. This month, it
finalized a deal to sell a majority interest in its specialty steel
business to SeAH Besteel for KRW567 billion. The deal will lower
Posco's net debt by 2.6%.
Management is planning to use the proceeds from additional asset
sales for further debt paydown. Net debt stands at KRW22 trillion,
or about 3.5 times estimated ebitda.
Warren Buffett's Berkshire Hathaway is a long-time shareholder
in Posco. Berkshire began investing in 2007, and now holds about a
5% stake. While the shares have not been one of Buffett's best
investments, clearly he still believes in the business.
With its prospects improving, Posco could reward Buffett
yet.
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