LIG Nex1
The author is an analyst of NH Investment & Securities. He can be reached at jaekwang.rhee@nhqv.com -- Ed.
Although lowering our TP, we stick to a Buy rating on LIG Nex1. From a mid/long-term perspective, we view LIG Nex1’s shares as being undervalued at their current price point. A record-high order backlog is to drive mid/long-term earnings growth, and additional exports are likely amid rising global security threats.
Lower TP, but still consider shares undervalued
We lower our TP on LIG Nex1 from W150,000 to W120,000, reflecting a cut in 2023E OPM (10→8%) made in light of: 1) a widening portion of low-margin R&D sales; and a 2) heftier expense burden (eg, facility expansion and test facility construction) in preparation for full-scale domestic and overseas mass production. But, we adhere to our existing sales forecasts.
Despite the drop in TP, we reiterate a Buy rating. From a mid/long-term perspective, we view LIG Nex1’s shares as being undervalued, noting that the firm has achieved its highest-ever order backlog of W12.3tn. In 2022, it won large-scale development projects such as LAMD and long-range air-to-surface weapons in the domestic market. In the overseas market, new orders such as M-SAM export contracts to the UAE reached W6.4tn. Given this sizeable order backlog, the company’s mid/long-term earnings growth trend is set to sustain.
In addition, tensions are rising due to geopolitical disputes such as the Russia-Ukraine war and US-China competition for supremacy. Demand for precision guided weapons is projected to expand steadily going forward, and the possibility of additional overseas orders looks quite high. According to press reports, LIG Nex1 signed in February an MOU with Romania’s state-run defense company ROMARM for anti-aircraft missiles.
1Q23 preview: To show y-y rise in sales, but y-y drop in OP
In 1Q23, LIG Nex1 should show a 14% y-y rise in sales, but a 23% y-y drop in OP. Due to the nature of being a defense industry player, the firm’s earnings visibility is low. Considering that its profitability was bolstered in 1Q22 by one-off factors such as dollar/won rate effects and loss provisioning reversals, the likely decline in 1Q23 OP is largely attributable to high-base effects.