Growth Model Stable
The author is an analyst of NH Investment & Securities. He can be reached at jinmyung.choi@nhqv.com. -- Ed.
Hanwha Systems’ 1Q20 results confirm that its sales and business operations stand clear of damage from Covid-19. The firm’s defense business benefited domestic defense budget expansion, and earnings continued to improve at the ICT division in response to the Hanwha Group’s expanding investment.
Raise TP to W10,000: 2020E target P/E of 16x
We boost our target P/E for Hanwha Systems from 13.5x (W8,200) to 16x (W10,000). The average P/E for global defense industry peers has upped from 14x to 16x, evidencing the fact that there was no significant damage to defense sector earnings due to the Covid-19 outbreak.
1Q20 review: Earnings satisfy forecasts
On a consolidated basis, Hanwha Systems posted 1Q20 sales of W282.3bn (+8.3% y-y), slightly topping our estimate. We view the company’s 1Q20 results as confirming that its sales and business operations stands clear of earnings damage due to Covid-19.
OP came in at W10.9bn (OPM of 3.9%), satisfying both our estimates and market expectations. No additional major variables were recorded on the non-operating side.
Boasts stable growth model: Earnings growth to sustain regardless of Covid-19
Going forward, earnings improvement is to sustain on orders for an insurance core solution improvement project (phase 2) from the Hanwha Group. Over the long term, we expect greater demand for data center operation and ERP projects, noting that the Hanwha Group is continuing to add affiliates via M&A deals.
Earnings at the defense division should continue to grow free of Covid-19 effects. At the end of last year, the firm won a contract (third mass production) for the Tactical Information and Communication Network (TICN)—full-scale delivery is anticipated from 2Q20.
Also boding well for long-term earnings is Hanwha Systems’ recent start of AI-related outsourcing sales. The media is reporting that the firm recently delivered its AOS Alpha system (AI for calculating car repair costs via photos) to the Insurance Development Institute (about W5bn). Hanwha Systems is also expected to release a variety of core solutions to be offered to Hanwha Group insurance and financial affiliates.