[Click eStock] "Korea Aerospace Industries, FA-50 Order Momentum Highlighted"... Target Price Up

[Asia Economy Reporter Lee Jung-yoon] Daol Investment & Securities maintained a buy rating on Korea Aerospace Industries (KAI) on the 9th, stating that the profitability of airframe components has significantly recovered and that strong FA-50 order momentum is emerging from Poland, Malaysia, Egypt, and other countries. The target price was raised from the previous 69,000 KRW to 82,000 KRW.

KAI's operating profit for the second quarter of this year was 34 billion KRW, falling short of consensus estimates. This was due to a decrease in sales related to the reconstruction of bases in Iraq and a provision of 22 billion KRW. Excluding these factors, the operating profit was 56.4 billion KRW, marking a surprise.

Although exports of complete aircraft were minimal, domestic defense sales remained steady with increased deliveries related to the KF-21 system development and Surion series. Airframe component sales rose 49% year-on-year to 171.3 billion KRW, continuing the turnaround seen in the first quarter. Airframe components are expected to exceed the guidance of 620 billion KRW this year, reaching 700 billion KRW, and surpass 1 trillion KRW in 2024, becoming a key pillar of earnings growth.

Exports of complete aircraft are also cited as a pillar driving future earnings and current stock prices. The export backlog stands at 1.1 trillion KRW for 8 units to Thailand and Indonesia, with earnings recovery starting from 2023 through 2024. If the recently signed basic contract for 48 FA-50s to Poland begins deliveries from the end of 2022, current earnings forecasts could be revised upward. Choi Kwang-sik, a researcher at Daol Investment & Securities, explained, "Currently, the stock price should reflect earnings faster than expected," adding, "Also, the short delivery period raises expectations for profitability."

Researcher Choi added, "In addition, the selection of the preferred bidder for Malaysia's FA-50 (18 units, 1.1 trillion KRW) is imminent, and as suggested by the Black Eagles airshow over the pyramids in Egypt last weekend, negotiations are ongoing for more than 36 units, with our estimate at 168 FA-50s," further stating, "In 2023, negotiations will proceed for 60 T-50 units (3.5 trillion to 5 trillion KRW) and MRO in the UAE, as well as for the US trainer aircraft business."

Furthermore, the one-team agreement with Lockheed Martin not only pertains to the US trainer aircraft business but also indicates that global demand for the FA-50 exceeds 500 units, suggesting that the product competitiveness of the FA-50 is steadily improving.