Faring Better than Market Expectations
The author is an analyst of Shinhan Investment Corp. He can be reached at eoyeon.hwang@shinhan.com. -- ED.
1Q20 OP exceeds market expectations at KRW3.2bn (positive swing YoY)
Hanwha Aerospace posted operating profit of KRW3.2bn (positive swing YoY) on sales of KRW1tr (+7.6% YoY) for 1Q20, faring far better than market expectations for an operating loss of KRW3.2bn. Stronger-than-expected results were attributable to: 1) increase in USD/KRW exchange rate (+6.1% QoQ); 2) one-off net reversal gains; 3) normal shipments of civil aircraft engines; and 4) inclusion of earnings from Hanwha Aerospace USA (formerly EDAC Technologies) in consolidated statements. The company booked KRW9.1bn in one-off reversal gains following Hanwha Defense Systems’ court battle win against the government regarding administrative restrictions. R&D expenses for the LAND400 project reached KRW3.8bn (+KRW3.5bn YoY). Hanwha Aerospace USA, added to consolidated statements from 4Q19, reported sales of KRW52.3bn and operating profit of KRW4.4bn for 1Q20.
Earnings from the parent, defense operations and Hanwha Techwin were all in line with expectations for 1Q20, remaining largely unaffected by the COVID-19 pandemic. However, Hanwha Power Systems saw sales drop 33.5% YoY to KRW18.3bn with the recognition of sales (KRW12bn) from the Saudi Aramco project postponed. Hanwha Precision Machinery, which generates 43% of sales from China, posted a 31.6% YoY decline in sales due to impact of the pandemic.
Private sector concerns already priced in; shift focus to 2H20F earnings growth
For 2020, we forecast sales at KRW5.6tr (+6.1%YoY) and operating profit at KRW230.2bn (+39.3%YoY). Considering one-off costs (KRW81.9bn) booked in 2019 and contribution of Hanwha Aerospace USA (2020F KRW10.3bn) to consolidated earnings, we expect full-year operating profit to meet expectations this year. Operating profit will likely drop 18.2% YoY in 2Q20 due to the pandemic impact and high YoY base, but should turn upward from 3Q20. Airbus has cut aircraft deliveries by 30% from April. Given that engines are supplied to aircraft manufacturers 1.5 years before the delivery of planes, we believe sales will normalize from 4Q20.
Retain BUY for a target price of KRW33,000
We retain our BUY rating on Hanwha Aerospace for a target price of KRW33,000, based on the 12-month forward EPS forecast of KRW2,310 and a target PER of 14.4x. Shares have corrected by 32.5% YTD due to concerns over declining shipments of aircraft engine parts. Even after full reflection of the COVID-19 impact, we expect company-wide operating profit to grow in earnest from 3Q20 (+40.6% YoY).