Korea Aerospace Industries: Expecting a Déjà Vu of 2014-2016

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The authors are analysts of Shinhan Investment Corp. They can be reached at eoyeon.hwang@shinhan.com and younghoon.song@shinhan.com, respectively. – Ed.

4Q21 OP to beat consensus by 46.2% at KRW56.3bn (TB YoY)

Korea Aerospace Industries is expected to report operating profit of KRW56.3bn (positive swing YoY) on sales of KRW835.1bn (+9.6% YoY) for 4Q21, beating the consensus estimate of KRW38.6bn by 46.2%. The delivery of six Surion helicopters delayed from 3Q21 should add KRW133.5bn to sales. Full-year order intake is estimated at KRW2.6tr (-39.2%YoY) for 2021. Major orders secured in 4Q21 include: 1) Baekdu-II ISR aircraft system project (worth KRW0.7tr); and 2) performance-based logistics (PBL) contract for T-50 series aircraft (KRW0.2tr).

Defense sales are forecast at KRW607.3bn (+1.3%YoY) for 4Q21. Surion-related sales will likely surge 113.6% YoY to KRW267bn on reflection of delayed orders. Sales from the KF-21 development project should be similar to 4Q20 levels at KRW203.3bn (-9.3% YoY). Aircraft parts sales are projected at KRW166.3bn (+66.7% YoY), marking steady recovery backed by a rebound in aircraft deliveries at Boeing and Airbus.

OP to climb from 3Q21 bottom and reach KRW484.3bn (+140.6%YoY) in 2023

We expect earnings to continue on an uptrend from 3Q21 bottom, with full-year operating profit forecast at KRW201.3bn (+57.8%YoY) for 2022 and KRW484.3bn (+140.6%YoY) for 2023. Earnings growth in 2022 should be driven by: 1) new production of TA-50 trainers (KRW275.3bn in sales); 2) growth in sales from the KF-21 project (+23.7% YoY); and 3) recovery in aircraft parts sales (+41.6% YoY).

In 2023, Korea Aerospace Industries is slated to launch deliveries of orders secured in 2021 from Indonesia (TA-50 trainers worth KRW137.2bn) and Thailand (T-50 trainers worth KRW74.8bn). Potential FA-50 orders from Senegal (KRW176.4bn) and Malaysia (KRW235.2bn) expected in 1Q22 are reflected in our 2023 earnings forecasts. As for domestic operations, sales from the KF-21 project will likely climb 20.7% YoY to KRW1.2tr. The company should also book new sales from the development of mine countermeasures helicopters (KRW59.5bn) and marine attack helicopters (KRW112bn). Aircraft parts sales are projected at KRW889.5bn (+19.1%YoY).

Retain BUY for a target price of KRW42,000

We retain our BUY rating on Korea Aerospace Industries for a target price of KRW42,000, based on 2022FEPS of KRW1,457 and a target PER of 28.8x (10% premium to the PER average of 26.2x recorded during earnings growth in 2014-2016). Earnings bottom was confirmed in 3Q21. Winning orders from Malaysia and Senegal in 1Q22 should drive growth in order intake and earnings as seen in 2014-2016.

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