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IPO

Hyundai Samho’s IPO faces hurdle on steel prices, baffling IMM PE

Hyundai Heavy Industries’ planned IPO this year will likely serve as a precursor to Samho’s listing

By Jul 27, 2021 (Gmt+09:00)

Hyundai Samho Heavy shipyard
Hyundai Samho Heavy shipyard

Back in the early 2010s, Hyundai Samho Heavy Industries Co. was a strong shipbuilder earning 800 billion won ($696 million) a year on sales of 4.8 trillion won until the shipbuilding industry was drawn into a crisis trigged by financial woes in Europe.

To get out of the fix, the South Korean shipbuilder sought to raise funds and Seoul-based IMM Private Equity came to the rescue with a pre-IPO investment of 400 billion won in 2017.

The investment came with the condition that Hyundai Samo Heavy list its shares on the domestic bourse within five years or make a significant operating profit so that the private equity firm could exit with decent gains.

If the shipbuilder fails to meet the conditions, it has to pay a penalty worth about 200 billion won, or part of the investment principal plus a 9% internal rate of return (IRR).

Now that the IPO deadline, set at the end of 2022, is approaching, Hyundai Samho, a unit of Hyundai Heavy Industries Group, finds itself in a quandary.

Last week, the company posted a consolidated operating loss of 266.9 billion won for the second quarter, despite a series of big shipbuilding orders it has clinched since the start of the year on the back of a rise in cross-border transactions globally.

Just like other domestic shipbuilders, Hyundai Samho’s earnings have taken a hit by the soaring prices of steel plates used in shipbuilding.

Korea Shipbuilding & Offshore Engineering Co. (KSOE) recently reported that it swung to a huge operating loss in the second quarter from a year ago largely due to a hefty one-time provisioning against a steep rise in steel plates.

Hyundai Heavy's dockyard
Hyundai Heavy's dockyard

HIT BY HIGHER STEEL PRICES

Higher steel plate prices are hurting shipbuilders’ bottom-line as meaningful gains in shipbuilding orders are reflected in earnings over a period of years.

KSOE is the holding company of Hyundai Heavy Industries Group’s three units – Hyundai Heavy Industries Co., Hyundai Mipo Dockyard Co. and Hyundai Samho Heavy.

Korea’s three big shipyards are currently in negotiations with the country’s major steelmakers, including POSCO and Hyundai Steel Co., over the prices of steel plates to be supplied under contracts for the rest of the year.

According to industry officials, steelmakers are demanding a 64% increase from the first half, to bring the selling price to 1.15 million won a ton for the second half, citing higher prices of raw materials, including iron ore.

The business outlook for Hyundai Samho is split among local credit rating companies.

NICE Investors Service Co., which rates Hyundai Samho’s senior unsecured corporate bonds as A-, said it expects the shipbuilder to improve its earnings going forward, given the recovery in the shipbuilding industry.

However, Korea Investors Service Inc. has assigned a BBB+ rating to Hyundai Samho, saying it will take quite some time before it returns to profit due to the higher steel plate prices, the resultant loss provisioning and the shipbuilding orders that it previously won at cheap rates.

HYUNDAI HEAVY’S IPO IS PRECURSOR

Analysts say Hyundai Samho may face legal action unless it reschedules its IPO plan or alters other investment terms with IMM PE.

The private equity firm raised the 400 billion won from more than 20 institutional investors, making it hard to readjust investment recovery terms on their behalf.

LNG-powered vessel built by Hyundai Samho Heavy
LNG-powered vessel built by Hyundai Samho Heavy

Among the institutions that joined the IMM-led equity investment are the National Pension Service (NPS), the Korea Teachers Pension and Korea Post, which prefer to recover their investment through an IPO.

Meanwhile, IMM PE has already recovered part of its own investment in Hyundai Samho in 2018 when it received shares of KSOE in return for its equity stake in Hyundai Samho.

Hyundai Heavy Industries Group is widely expected to list Hyundai Samho in 2022, following Hyundai Heavy Industries Co.'s planned IPO in September of this year.

The success of Hyundai Heavy Industry’s IPO and the shipbuilding industry outlook will likely determine the fate of Hyundai Samho’s stock market listing, analysts said.

Write to Hyun-Il Lee at hiuneal@hankyung.com

In-Soo Nam edited this article.

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