HMM’s shares undervalued despite $12.5 billion in cashable assets

South Korea’s largest container line HMM Co. has seen its shares trapped in a boxed range for a protracted period despite its spectacular earnings growth and decent cashable assets.

On Friday, HMM, listed on the main bourse, finished up 3% at 20,850 won in line with the benchmark Kospi index’s 3.4% gain following the overnight rally on Wall Street.

However, the stock has fallen 30% over the past six months.

Analysts said the company’s shares remain subdued, or “deeply undervalued” due largely to risks related to the privatization of the currently state-owned company and share overhang concerns.

According to the Financial Supervisory Service, HMM’s cash and cash equivalents stood at 16.57 trillion won ($12.5 billion) at end-September, up 160% from 6.53 trillion won at the end of 2021.

That’s higher than the company’s market capitalization of about 10 trillion.

The company’s financial structure is also solid with its debt-to-equity ratio at 36.85% at the end of September.

HMM’s strong cashable assets come from its growing earnings as the global economy is recovering from the pandemic, boosting cargo volumes and freight rates.

The company saw its third-quarter operating profit rise 14.5% from the year-earlier period to 2.6 trillion won. For the first nine months of the year, its profit soared to a record 8.69 trillion won.

However, its stock is undervalued with the company’s 12-month forward price-earnings ratio (PER) at 1.91, far below its smaller rival Pan Ocean Co.’s multiple of 4.58.

PERPETUAL BONDS

Analysts say HMM’s shares are pressured by concerns over the possibility of its main creditors-cum-shareholders converting their bond holdings into shares and dumping them into the market.

State-run Korea Development Bank (KDB), its largest shareholder and top creditor, is currently exploring a sale of its stake in the container ship carrier to recover taxpayers’ money it injected into the company.

HMM, formerly known as Hyundai Merchant Marine, was taken over by KDB in 2016 after the company accumulated huge losses amid an industry slowdown.

In July of 2021, the state-run bank said it is seeking to sell 2.6 trillion won in perpetual convertible bonds issued by HMM to lay the groundwork for the privatization of the company. HMM issued over 3 trillion won in bonds in 2017 to raise operating funds, and the state-run bank assumed most of them.

KDB currently owns 20.7% of HMM as its largest shareholder, followed by state-run Korea Ocean Business Corp. (KOBC), which holds a 20% stake.

If both KDB and KOBC convert their CBs into shares, the two largest shareholders’ combined stake in HMM will reach up to 80%. With that stake size, it’s almost impossible to privatize the shipper by selling to a single investor, analysts said.

To ease the financial burden of a potential buyer, KDB has said it plans to sell its stake to the market in a gradual way, which in turn could create share overhang concerns.

Each perpetual bond held by KDB and KOBC can be converted into shares at 5,000 won a share. If all their bond holdings are converted, up to 535.8 million shares could hit the market, causing a significant drop in share prices, analysts said.

Write to Ik-Hwan Kim at lovepen@hankyung.com
In-Soo Nam edited this article.