PKX - POSCO: Watch Shareholder Capital Return And Investor Relations Plans

2023-06-16 08:04:53 ET

Summary

• POSCO Holdings' mid-term shareholder capital return outlook has become more favorable with the introduction of a minimum absolute dividend payment for the 2023-2025 period.
• There is the potential for the stock price of POSCO International, PKX's key listed subsidiary, to rise going forward with a step-up in investor relations activities.
• I continue to be bullish on POSCO Holdings, considering the company's new capital return plan and the potential increase in POSCO International's share price.

Elevator Pitch

My Buy rating for POSCO Holdings Inc. (PKX) [005490:KS] shares remains unchanged. In my prior write-up for POSCO Holdings published on April 4, 2023, I highlighted the positive prospects for the company's steel and non-steel businesses.

The potential re-rating of POSCO International Corporation's [047050:KS] shares (PKX's subsidiary) and the new shareholder capital return plan for POSCO Holdings are the key re-rating catalysts for PKX. Given that there are visible catalysts in place for POSCO Holdings, I see no reasons to change my existing Buy rating for PKX.

PKX's Intermediate Term Shareholder Capital Return Plan

At the company's most recent Q1 2023 results call , POSCO Holdings outlined its new shareholder capital return plan for the medium term, which I view as favorable.

In the past, PKX used to guide for a minimum dividend payout ratio as part of the company's capital return framework. Considering the PKX's core steel business is cyclical, this implies that POSCO Holdings' historical dividends fluctuated with the company's actual earnings or cash flow. POSCO Holdings' prior dividend policy and approach meant that certain income-focused investors avoided investing in PKX due to the lack of dividend predictability and stability.

Going forward, things will be different. POSCO Holdings' new shareholder capital return plan for the FY 2023-2025 period introduces a minimum absolute dividend per share of KRW10,000 which will be paid out to shareholders every year regardless of PKX's actual financial performance. This implies investors are assured of at least a 2.6% dividend yield assuming they invest in POSCO Holdings now based on its current share price. Note that a single ADR for PKX is equivalent to a quarter of POSCO Holdings' Korean ordinary share, and the KRW10,000 minimum payout guidance is based on a single Korean ordinary share.

More significantly, POSCO Holdings' actual dividends for the FY 2023-2025 time frame will comprise of both the minimum KRW10,000 per share dividend, and additional distributions equivalent to 50%-60% of the company's yearly free cash flow.

According to S&P Capital IQ's consensus data, the sell-side analysts are forecasting that POSCO Holdings will pay out dividends per share of KRW11,830, KRW13,078, and KRW14,038 for FY 2023, FY 2024, and FY 2025, respectively. This translates into reasonably appealing consensus forward FY 2023, FY 2024, and FY 2025 dividend yields of 3.1%, 3.4%, and 3.6%, respectively for POSCO Holdings.

I think that POSCO Holdings' new 2023-2025 capital return plan will drive the company's share price up, as PKX's recent capital return move should help to draw in dividends-focused retail and institutional investors as new shareholders.

Subsidiary POSCO International Steps Up Investor Relation Activities

POSCO International Corporation is a 70.7%-owned subsidiary and the trading & energy business arm of POSCO Holdings, which is separately listed on the Korea Exchange with the 047050:KS ticker. PKX will naturally be the beneficiary of an increase in POSCO International's share price. Based on my calculations, POSCO Holdings' equity interest in POSCO International (based on market value) accounts for a meaningful 15% of its market capitalization.

With my earlier April 2023 update for PKX, I noted that POSCO International is projected to deliver a "double-digit percentage increase in 2023 operating income" by executing on plans to be "fully integrated across the Liquefied Natural Gas or LNG value chain" over time.

But good financial results alone are insufficient to push up the stock price of POSCO International, which appears to be lacking in terms of analyst and investor outreach. As an example, POSCO International currently has seven sell-side analysts covering its shares based on S&P Capital IQ data. In contrast, there are 23 analysts who have its parent POSCO Holdings as part of their coverage universe.

The good news is that there are signs that POSCO International is stepping up its investor relations activities. On May 18 this year, POSCO International issued a press release revealing that it has created a new investor relations department and hired an experienced investor relations professional, Chung In-Cheol, to lead the new division. POSCO International also indicated in the media release that it will host various investor events such as "Analyst Day" and "Value Day" in the near future. Separately, The Korea Times recently reported on June 14, 2023 that POSCO International has organized its first investor roadshows for investors outside of South Korea this month since the COVID-19 outbreak.

More importantly, POSCO International stressed in the May 18 press release that the company's stock is "undervalued compared to its actual potential." The market currently values POSCO International at pretty attractive consensus forward next twelve months' EV/EBITDA and normalized P/E valuation multiples of 7.4 times and 9.1 times, respectively.

Taking into account expectations of strong positive operating profit expansion and a step-up in investor relations activities for this year, it is realistic to expect POSCO International's shares to perform well in 2023 which will be a catalyst for POSCO Holdings.

Concluding Thoughts

I have identified two re-rating catalysts for POSCO Holdings that support my Buy rating for PKX. One catalyst is the introduction of a minimum absolute dividend distribution as part of POSCO Holdings' intermediate term capital return plan. The other catalyst is the potential rise in the share price of PKX's subsidiary, POSCO International, driven by a greater emphasis on investor relations.

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