[Click eStock] "Korea Aerospace Industries, Strengthening Order Momentum... Earnings Improvement Expected"

Shinhan Investment Corp. Report

[Asia Economy Reporter Minji Lee] Shinhan Investment Corp. maintained a buy rating and a target price of 67,000 KRW for Korea Aerospace Industries on the 17th.

Fourth-quarter sales are expected to be 761.5 billion KRW, with an operating profit of 38 billion KRW. Sales are projected to decrease by 4.4% year-on-year, while operating profit is expected to turn positive. Compared to market expectations, these figures are 3% and 6% below estimates, respectively.

By business segment, the domestic sector is expected to proceed normally with deliveries of Surion and development sales of KF-21 and LAH. Although contracts were secured for the mine countermeasure helicopter system development (345.4 billion KRW) and the amphibious assault helicopter system development (438.4 billion KRW) in the fourth quarter, there appear to be no immediate issues regarding provisions. The overseas segment likely saw a decline in sales due to delays in the Iraq base reconstruction project. The airframe parts segment is expected to benefit from reopening effects, increasing to 188.7 billion KRW, a 36% rise, but the depreciation of the exchange rate is expected to have limited margin improvements.

The order momentum is analyzed to strengthen further. In the first half of this year, orders from Malaysia and in the second half from Egypt's FA-50 are expected to exceed 4 trillion KRW annually. Corresponding sales growth is also anticipated. Researcher Dongheon Lee of Shinhan Investment Corp. stated, “The company disclosed orders last year including 4.2 trillion KRW for Poland's FA-50, 4 trillion KRW for Embraer’s RSP, 300 billion KRW for LCH mass production, and 800 billion KRW for development contracts. These orders are expected to translate into performance in the second half of this year,” adding, “The Poland order, which has good margins, will boost this year’s results.”

Researcher Dongheon Lee emphasized, “Attention should be paid to the increasing competitiveness in the global market,” and analyzed, “After failing to secure the U.S. advanced trainer aircraft project in 2018, the company seemed to be declining, but the Poland order marks a turning point. It is also valid to approach from a long-term investment perspective in commercial aircraft and space businesses.”