Analysts question Doosan Group’s capital resilience

Market observers raised concerns that Doosan Group’s capital buffer appears to be shrinking as its aggressive expansion of scope and size by raising funds through a leveraged buyout (LBO) has increased its debt burden.

A report by KB Investment and Securities said it will be difficult for the country’s 10th-largest conglomerate, which owns affiliates including the country’s largest manufacturer of construction equipment Doosan Infracore, and the country’s leading power equipment manufacturer Doosan Heavy Industries and Construction, to achieve a positive financial trend as it already faces mounting interest due to massive debt and difficulty reducing funding costs.

“The capital resilience of Doosan Group seems to be gradually wearing thin as its strategy to grow in size through an LBO has saddled the conglomerate with hard-to-reduce debt, when it already faced a financial burden for its continued provision of liquidity,” said Jeong Dae-ho, an analyst at KB Investment and Securities.

After Doosan Infracore took over U.S.-based equipment manufacturer Bobcat for $5.1 billion jointly with Doosan Engine in 2007, the company has been suffering rumors of a possible liquidity crunch, as it raised necessary funds for the M&A deal through the LBO.

An LBO essentially allows the takeover of a company without committing all the necessary capital, as the target company’s assets are often used as collateral for borrowed capital.

Jeong said one of the biggest headaches for Doosan Group is Doosan Engineering and Construction.

Doosan Engineering and Construction in February announced a plan to improve its finances by mobilizing $1.03 billion - $414 million through a capital increase, a capital injection in kind worth $524 million by Doosan Heavy Industries and Construction’s heat recovery steam generator (HRSG) operation, and a sale of assets worth $137 million.

The former is under financial burden amid the protracted global economic recession and the recession in the real estate market.

KB Investment and Securities said the measure is deemed as shoring up the capital base and increasing liquidity for the short term for Doosan Engineering and Construction, which dispelled the possible credit risk of the construction arm. But it warned Doosan Group still has a long way to go.

“The measure is also deemed as effectively preventing Doosan Engineering and Construction’s financial burden from spreading to Doosan Group,” said Jeong of KB Investment and Securities. “The next one to two years will be the most important period for Doosan Engineering and Construction. Without a substantial improvement in their financial condition, this may spark uncertainty.”

It said Doosan Group’s affiliates should center on improving financial stability rather than business expansion.

“Doosan Infracore hasn’t yet completely overcome the burden of acquiring Bobcat. Doosan Heavy Industries and Construction’s seeking to buy the Italian manufacturer of thermoelectric power plants Ansaldo Energia could raise the overall credit risk of the entire Doosan Group,” Jeong said.

“Companies in the heavy industrial sector need huge investments before a profit can be made, and the fiscal health of Doosan Infracore isn’t faring badly,” said an executive at Doosan Group.

Meanwhile, Woori Investment and Securities maintained a buy recommendation on Doosan Infracore, but lowered its target price from 20,000 won ($17.91) to 18,000 won as it revised down its 2013 and 2014 earnings estimates.

“Doosan Infracore turned in an operating loss in Q4,” said Paul Hah, an analyst at Woori. “We attribute the weak operating profit to worsening business conditions on a decline in excavator sales in China, the weak performance of Bobcat’s European division and fiscal cliff woes in the U.S. In the case of Doosan Heavy Industries and Construction, the main factors affecting the construction arm’s share price will likely be the new order trend, earnings recovery and improved market sentiment.”

Woori kept a buy recommendation for Doosan Heavy Industries and Construction, but shaved its target price by 11 percent to 62,000 won from 70,000 won reflecting changes in its own earnings estimate due to soft new orders and planned transfer of its HRSG business to Doosan Engineering and Construction.

By Kim Mi-ju [mijukim@joongang.co.kr]