[Click eStock] "LIG Nex1, the Most Undervalued Defense Stock... Target Price Up 16%"

Daol Investment & Securities Report

[Asia Economy Reporter Minji Lee] Daol Investment & Securities maintained a strong buy rating on LIG Nex1 on the 9th and raised the target price by 16% to 145,000 KRW.

LIG Nex1's operating profit margin in the second quarter improved to 9.6%, compared to the first quarter's operating profit margin of 8.8% after excluding one-off items. This improvement reflects the favorable exchange rate effect on exports and supportive domestic defense policies. Despite the export ratio being 9.4% in the second quarter, lower than the previous quarter's 11%, the company recorded strong performance.

Among the 2.6 trillion KRW order for the UAE Cheongung-2 announced on January 17 this year, 82 billion KRW worth of orders were recognized in the second quarter, with the remaining orders expected to be recognized by the end of the year.

From this month, deliveries of walkie-talkies worth 140 billion KRW to Indonesia have begun, but this is expected to be aimed at maintaining the annual average export ratio of 15%, making it difficult to expect high margins like those of PGM.

Researcher Kwangsik Choi of Daol Investment & Securities said, "Although the export ratio did not increase significantly in the second quarter, the domestic defense policy and exchange rate effect led to a second-quarter surprise," adding, "Export deliveries from the backlog are expected to increase from 2023 (export ratio 17%), and in 2024, Cheongung-2 will be deployed in the UAE, leading to a turnaround."

At the current stock price level, the price-to-earnings ratio (PER) based on this year is 14 times, but the PER for 2024 and 2025 is only 9 times and 7 times, respectively, making it the most undervalued among defense industry stocks.

Researcher Choi explained, "Although the company may feel sidelined as its name was not mentioned in Poland's K-defense weapons system purchases, it is difficult to find export news for the company's weapon systems except for defensive systems like Cheongung-2," adding, "It is likely benefiting from the EU's military buildup and increased demand for weapon systems."