Hyundai Samho ships out of Posco

Shipbuilder executes clean-up trade in steel producer as investors watch for any signs of a turnround in sentiment towards the sector.
Will the steel sector turn upwards?
Will the steel sector turn upwards?

Hyundai Samho Heavy Industries, a Korean shipbuilder, raised Won 226.15 billion ($190.8 million) after offloading its entire stake in steelmaker Posco following Tuesday's close. 

The deal comes at a time when Posco is trading at a historically low valuation and investors stand primed for any signs of a turnround in sentiment towards the beleaguered steel sector.

The proceeds also represent a much needed cash infusion for Hyundai Samho, which has been suffering from falling and cancelled orders in line with the equally battered shipbuilding sector.

The 1.308 million share trade was priced at Won 172,900 after being marketed on a range of Won 172,130 to Won 177,380. This represents a 4.5% discount to the stock's Won 181,000 close.

This was fairly chunky by Korean standards but not in comparison to recent months. In June, KDB offloaded a stake in Kumho Petrochemical at an 8.5% discount, while Samsung Life shareholders sold out of the group at a 6.3% discount in May.

At the 4.5% discount level the order book was reportedly multiple times subscribed with a total of roughly 55 lines at the final tally.

Allocations had a roughly 70/30 split between international and domestic investors, with the top five accounts taking 50% of the deal. One large order in particular skewed allocations heavily towards international investors. 

"There was good local demand," said a person close to the deal. "From the international side there were some structural shorts in there but also fundamental players who see deep value in Posco and are positioning themselves for a hopeful inflexion point."

It has been a long time in coming, with the stock down 34.3% year-to-date and 1.36% on the day of pricing. Posco has badly underperformed the Kospi, which was up 0.88% on Tuesday and 3.47% year-to-date. 

Volatile market conditions have made all accelerated equity transactions extremely difficult in recent months with many companies turning to their existing shareholder base and raising money through rights issues instead.

However, Posco's offering was manageable given that it only represented 3.5 trading days and 1.5% of its outstanding share capital. The deal was also lucky as it managed to nip into the market on a relatively good day for Asian stocks and price before sentiment turned far sourer as the European and US trading days got into their stride.

In the US on Tuesday, Posco's ADRs closed down 5.22%, in part a reflection of the new deal but also wider market softness. The group's ADRs have about $850 million in short interest outstanding.

At Won 181,000, Posco is trading at just 0.3 times forward price-to-book, plus 10.5 times 2015 earnings and 8.4 times 2016 earnings on a consensus basis. 

Stabilising steel prices?

In a research report commenting on the group's second-quarter earnings, Credit Suisse said it expected the share price to remain supported by Posco's dividend yield of 4.4% and stable core steelmaking margins. 

The group reported second-quarter operating profit of Won 608 billion, up 7% year-on-year but down 2% quarter-on-quarter. This was in line with expectations, with higher sales of 8.9 million tons offsetting a 15% year-on-year contraction in its average selling price to Won 741,000 per ton.

Net profit came in at Won 210 billion, dragged down by Won 78 billion in foreign exchange losses and a Won 170 billion loss at subsidiary Posco Plantec. 

The group said it is hoping to boost operating profit by scaling back its subsidiaries and cutting costs. By 2017 it aims to have cut the number of its domestic subsidiaries from 47 to 22 and its overseas operations from 181 to 117. 

Credit Suisse concluded that this should help boost operating profit by Won 790 billion by the end of 2017 and has an outperform rating on the stock. 

Deutsche Bank has a more favourable view still and says Posco is its second top pick in Korea after Kepco. It bases this view on signs of a stabilisation in steel prices, or at least less dramatic declines and lower import volumes from China. 

On a regional basis, it believes steel prices will rebound as suppliers exert more discipline after a few quarters of historically low profitability.

For Hyundai Samho, the proceeds may go some way to shore up its balance sheet after it was downgraded by Korea Investors Service from A+ to A at the beginning of September. 

According to S&P Capital IQ figures, Hyundai Samho had a debt-to-equity ratio of 183.5% at the end of the first half. Total debt stood at $5.5 billion compared to negative Ebitda of $682.8 million.

Last week it was also reported that the UK's Seadrill had cancelled a $570 million order for a semi-submersible oil drilling rig 10 days before it was due to be delivered on the grounds that there had been a nine-month delay in delivery. 

Joint bookrunners for the equity offering were Credit Suisse, KDB Daewoo Securities and NH Investment & Securities. 

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