POSCO's (PKX) Q1 Earnings, Revenues Rise Y/Y, '18 View Solid

POSCO (NYSE:PKX) reported impressive results for the first quarter of 2018. The American Depository Receipt of this Korean steel producer gained 3% yesterday, ending the trading session at $83.05.

Net income in the quarter was KRW 1,084 billion ($1 billion), reflecting growth of 11% over the year-ago tally and 93.6% over the previous quarter. The sequential increase was driven by rise in operating profit and fall in impairment loss of assets, partially offset by adverse corporate tax impact.

Net earnings were KRW 3,106 per share or approximately $2.90 per ADR. This compares favorably with KRW 2,799.4 per share or $2.43 per ADR recorded in the year-ago tally and KRW 1,604.6 per share or $1.45 per ADR recorded in the previous quarter.

Revenues Grow Y/Y, Steel Production Advances

In the quarter, POSCO’s revenues totaled KRW 15,862 billion ($14.8 billion), increasing 5.2% year over year and 1.7% sequentially.

Crude steel production grew 2.3% year over year to approximately 9.3 million tons. Sequentially steel production fell 2.9% due to the lower number of calendar days in the quarter.

Product manufacturing in the quarter was up 4.2% year over year to 9.1 million tons while advanced 1.3% sequentially on the back of the completion of rationalization at the Gwangyang Works facilities.

Product sales increased 6.6% year over year and 8.5% sequentially to roughly 9.3 million tons. As noted, POSCO’s domestic sales ratio grew 440 basis points (bps) year over year to 56.9%.

Operating Margin Improves Y/Y

POSCO’s cost of sales was at 85% of the quarter’s revenues, flat compared with the year-ago quarter. Gross profit margin was maintained at 15%. Selling and administrative expenses inched up 0.6% year over year to KRW 898 billion ($0.8 billion).

Operating profit increased 9% year over year and 29.2% sequentially. The quarter-over-quarter improvement came on the back of higher contributions from steel (including POSCO and overseas steel) and non-steel (including POSCO Energy and POSCO Daewoo) businesses. Operating margin was 9.4%, up 30 bps year over year and 200 bps sequentially.

Balance Sheet

Exiting the first quarter of 2018, POSCO had a cash balance of KRW 10,676 billion ($10.1 billion), up from KRW 9,595 billion ($8.5 billion) recorded in the previous quarter. Its non-current liabilities increased 2.6% sequentially to KRW 12,944 billion ($12.2 billion).

The company’s current ratio in the quarter improved 3.2 percentage points sequentially to 167.5% while liabilities ratio grew 1.6 percentage points to 68.1%.

Outlook

For 2018, POSCO anticipates consolidated revenues to be approximately KRW 63 trillion, up from KRW 61.9 trillion predicted earlier. Finished product sales are estimated to be roughly 35.9 million tons versus the earlier forecast of 35.3 million tons. Crude steel production is projected to be nearly 37.6 million tons, slightly above 37.4 million tons anticipated earlier. The company targets at achieving domestic sales ratio of 60% in 2018.

Consolidated capital spending is likely to be KRW 4.2 trillion.

Global steel demand worldwide is anticipated to grow 1.8% year over year in 2018 on the back of demand expansion in India, the United States and European Nations as well as from Southeast Asian nations, the Middle East and North Africa regions. Steel demand in China is projected to be flat year over year.

Steel demand is predicted to be weak in 2018 compared with the previous year, evident from the predicted 1.6% fall in national consumption and 0.3% decline in export demand. Production in the automobile industry is expected to be weak in the second half of year while construction investments will also be poor due to weakness in investments for development of public infrastructure and housing markets. Shipbuilding industry will offer a relief as new orders are anticipated to grow.

POSCO Price and Consensus