Growth to Become Visible in Time
The authors are analysts of Shinhan Investment Corp. They can be reached at idh@shinhan.com and jiunmyoung@shinhan.com, respectively. -- Ed.
Initiate coverage with BUY for a target price of KRW74,000
We initiate coverage of Korea Aerospace Industries with BUY for a target price of KRW74,000. Our target price is based on the 2023F BPS of KRW14,924 and a target PBR of 4.9x, reflecting: 1) the company’s growing leadership in the global market for trainer jets and light attack aircraft; and 2) the considerable time lag between order intake and revenue recognition.
The target PBR is the average from 2011-2016, reflecting share valuations from the company's IPO up to the point before political issues started weighing on earnings. All-time high valuations were also reached during that period (market cap of KRW10tr), driven by notable growth in earnings from aircraft parts and expectations for order intake from the US Advanced Pilot Trainer Program. Since the outbreak of the Russia-Ukraine war, the company has been seeing even stronger demand for its trainer jets.
Aiming to take over the global market for trainer jets
In 1999, during the Korean financial crisis, the aircraft divisions of Hyundai Space & Aircraft, Samsung Aerospace, and Daewoo Heavy Industries were merged into a single company to create Korea Aerospace Industries. The company has since then developed and mass produced fixed-wing aircraft such as KT-1, TA-50 and FA-50 jets, as well as the rotary-wing Korea utility helicopter (KUH) Surion. The company’s light armed helicopter (LAH) and light civil helicopter (LCH) are at the final stage of development, and the next-generation KF-21 fighter jet is also under development. The country’s sole aircraft maker plans to work on small-size civil aircraft in the long term.
Exports of TA-50 and FA-50 jets are in full swing, with additional exports expected to Poland, Malaysia, Egypt, the UAE, and the US. Amid rising demand for reliable delivery of combat-ready aircraft in light of the Russia-Ukraine war, the relatively higher specifications of the company's aircraft vs. rival models are now seen as an advantage rather than a weakness.
Growth to become visible in time
Sales of aircraft parts soared by 59% YoY to KRW348bn in 1H22 on the reopening of economies. Test flights are underway for KF-21 fighter prototypes and systems development will be completed by 2026. As for the aerospace business, the company is currently focused on the 425 project for reconnaissance satellites but various projects are also in the pipeline.
We see ample room for further business expansion in trainer jets, KF-21 fighters, LAH/LCH, aircraft parts, and aerospace areas. However, given the time needed to develop and produce new aircraft, investors will need to take into consideration the time lag between new project wins and actual earnings growth when investing in Korea Aerospace Industries.