Solidifying Stance as Total Defense Solution Provider
The author is an analyst of KB Securities. He can be reached at newday@kbfg.com. -- Ed.
Maintain BUY, raise target price to KRW92,500
We raise our 12m TP for Hanwha Aerospace by 26.7% from KRW73,000 to KRW92,500 (12m fwd BVPS x 1.34x target P/B) to reflect earnings estimate revisions triggered by business segment reorganizations and Defense’s large-scale order intake, as well as changes in 1y MSB yield (risk-free rate), 30y KTB yield (terminal growth rate) and beta. We maintain BUY, as our new TP has 24.5% upside (25.6% incl. dividend income) vs. Aug 25 close, even amid the recent rally.
About to become Korea’s Lockheed Martin
When KB Securities’ coverage of Hanwha Aerospace began in March 2017 (Hanwha Techwin at the time), we noted the company’s potential in becoming Korea’s Lockheed Martin given its competitive edge of cornerstone products and synergies between defense subsidiaries. Given recent defense reshuffling and large-scale orders, our prediction seems to be coming to fruition.
Solidifying stance as total defense solution provider
Through a series of announcements, Hanwha Aerospace presented its reorganization plans involving a merger with wholly owned subsidiary Hanwha Defense and acquisition of Hanwha’s defense business (for KRW786.1bn), which produces gunpowder/explosives, missiles, laser equipment, hydrophones and navigation systems. The company plans to sell Hanwha Precision Machinery (KRW525.0bn) and Hanwha Power Systems (KRW210.0bn) to Hanwha. Following the reorganization, Hanwha Aerospace should solidify its stance as a total defense solution provider and enjoy synergies in the form of joint sales, joint development and infrastructure sharing.
Defense earnings growth to enjoy boost from anticipated contract with Poland
Hanwha Defense seems poised for sharp earnings growth after signing a basic contract with Poland for supplying 648 K9 Thunder howitzers. Our earnings projections assume that 48 units will be manufactured and shipped from Korea with the remaining 600 units manufactured by a local JV. This should translate into KRW3.94tn in revenue from the deal over the next decade. Once the official contract is finalized, we plan to revise our estimates accordingly.