A 100%-pure Defense Industry Player
The author is an analyst of NH Investment & Securities. He can be reached at jinmyung.choi@nhqv.com. -- Ed.
Free of Covid-19 effects, share price to return to pre-pandemic level
LIG Nex1’s 1Q20 orders and sales results evidence no damage from the Covid-19 crisis. The government’s defense expenditure growth trend remains intact, and the firm’s overseas exports are expanding. Given its solid 1Q20 results, we expect LIG Nex1’s share price to bounce back to the pre-pandemic level.
Raise TP: 2020E target P/E 16x
Adhering to a Buy rating, we raise our TP on LIG Nex1 from W28,500 (target P/E of 15x) to W36,000 (16x; 14.6% boost in EPS), drawing attention to: 1) greater-than-projected 1Q20 profitability on a favorable won/dollar rate and a widening export sales portion; and 2) a rise in peer group P/E (15x → 16x).
Registers 1Q20 earnings surprise; 2Q20 OPM to reach over 5%
LIG Nex1 posted consolidated 1Q20 sales of W352.2bn, and OP of W26.8bn. In particular, its 1Q20 OPM of 7.6% was higher than both our estimate (Apr 1, 2020; 6.3%) and consensus (2.6%). If stripping out the effects of the strong US dollar on margins at the firm’s export business (which accounted for 16.8% of the firm’s overall 1Q20 sales), OPM was in the 4~5% range.
Looking at 2Q20, we expect OPM to hit over 5%, noting both strong new order activity in 1Q20 and the fact that won/dollar rate is currently more favorable than at end-1Q20.
Long-term landscape: Stands as 100%-pure defense industry player spared from macro-economic worries
LIG Nex1 stands as a 100%-pure defense industry player boasting an earnings growth model that is independent of macro-economic changes. We expect the firm to enjoy additional top-line growth going forward, noting: 1) forecasts that Korean government defense expenditure will expand at a CAGR of 9.8% through 2023; and 2) the firm’s recent success entries into Southeast Asian markets. Also boding well, new products (including the L-SAM high-altitude air defense weapons system) are slated to being released from 2023.