Earnings growth is just a matter of time
When estimating quarterly earnings, it is difficult to predict one-off reversals, but provisions for losses related to the winning of development projects are predictable. LIG Nex1 has secured no notable system development projects in 3Q23, while it won the Lightweight Torpedo-II development project in 3Q22. Exports are accounting for an increasingly larger portion in total sales. We believe overseas projects received in 2018 have begun to contribute to sales in earnest. Although overseas order intake remained sluggish in 2016-2017, an upturn seen from 2018 is expected to translate to gradual sales gains starting from this year. The company should see a double-digit growth in sales for the time being.
Brisk demand from the Middle East through to the year-end
The absence of an arms deal with Poland served as a discount factor for LIG Nex1 vs. sector peers. Regardless of the reasons unknown, Poland may be in great need of weapons systems offered by the company. With negotiations currently underway with companies in Europe other than Poland, it is reviewing plans to establish an office in Eastern Europe within 2023.
Demand for the company’s defense systems remains solid in the Middle East after the UAE’s large-scale order for MSAM-II received in 2022. With the KRW2.7tr UAE order in 2022 raising the order backlog to KRW12tr, another major contract would further strengthen its mid/long-term growth trajectory. As the US no longer needs to be the “policeman” of the Middle East by securing energy independence, we believe the region’s import market for defense systems will continue to grow.
Safest bet among domestic defense plays
In the domestic market, defense contracts tend to be concentrated at the end of the year. Given a particularly large number of projects lined up for this year, we expect domestic order intake alone to reach around KRW2.5tr for full-year 2023. Looking ahead to next year, the company is also expected to see growth in overseas order intake with several projects currently under negotiation. It is difficult to check up on the progress of export negotiations as the product lineup includes offensive weapons. However, we note that countries around the world are increasing their deployment of strategic weapons systems. With the growing use of suicide drones in the ongoing Russia-Ukraine war, the importance of securing guided missiles and defense systems has been on the rise.
LIG Nex1 shares are currently undervalued at a PER of around 10x after growth in earnings. On top of high performance and reasonable prices of its defense systems, the government’s support for the defense sector and strengthened diplomatic efforts should come to fruition in the near term. As a pure defense play, LIG Nex1 is expected to remain on the most stable and comfortable growth trajectory among sector peers.