LIG Nex1: A Defensive Play on a Growth Trajectory

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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 meet consensus at KRW29.1bn (+39.0% YoY)

Nex1 will likely post sales of KRW576.4bn (+18.4% YoY) and operating profit of KRW29.1bn (+39.0% YoY) for 4Q21. Operating profit should meet the consensus estimate (KRW28.3bn), with the absence of sales from the radio system project in Indonesia (deferred to 2022) due to COVID-19 impact offset by increasing sales from domestic mass production projects.

Strong order inflows in 2018-2021 warrant earnings growth

LIG Nex1’s order backlog is forecast at KRW8tr (+10.2% YoY) for 2021, marking four years of consecutive growth. Defense orders tend to be concentrated in 4Q. We currently project the company’s order intake at KRW1.9tr for 4Q21. Our estimate may be revised upward upon confirmation of order intake from overseas clients, including KRW4tr worth of orders for KM-SAM (Cheongung) PIP from the UAE mentioned in media reports. In 2022, LIG Nex1 will likely secure KRW2.2tr-2.5tr in order intake from domestic projects alone.

Continuing steadily upward since 2018, order backlog is now at record high levels and should warrant earnings growth through 2024. We believe operating profit will grow by 66.6% YoY in 2021 and by 22.5% YoY in 2022 as a result. In 2021, decline in fixed cost ratio (-2.2%p YoY) from top-line growth (+14.1% YoY) should drive overall improvement in earnings. In 2022 and 2023, we expect a boost in earnings as sales are booked in earnest from large-scale overseas projects secured in 2018 and 2020, respectively.

Retain BUY and raise target price by 4% to KRW78,000

We retain BUY on LIG Nex1 and raise our target price by 4% to KRW78,000, based on 2022F EPS of KRW4,775 and a target PER of 16.3x (global peer average PER). LIG Nex1 shares have recently gained 9.9% on rising expectations for KM-SAM PIP exports to the UAE. The shares are currently trading at 2022F PER of 11.2x, remaining undervalued by 31% vs. global peers and by 45.7% vs. domestic peers.

There are increasing concerns that the new omicron variant could imperil economic recovery. However, LIG Nex1 stands out as the main defensive play. Its shares should rise with: 1) ample order backlog continuing to drive an uptrend in earnings; and 2) expectations growing for strong order intake at end-2021.

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