K2 Tanks Were Said to Be Selling Well—But Hyundai Rotem Price Targets Keep Getting Cut

[Financial News] Seven brokerage firms cut their target prices for Hyundai Rotem across the board after the company’s third-quarter results fell short of market expectations. Profitability in its defense business recovered, but delays in overseas tank orders lowered expectations for next year’s results. Analysts see whether the company can secure new orders, including a third contract with Poland, as key to a future rebound in its share price.
According to the financial investment industry on the 20th, all seven securities firms that analyzed Hyundai Rotem’s results that day—SK Securities, Hyundai Motor Securities, Shinhan Securities, iM Securities, Samsung Securities, Kiwoom Securities and Daishin Securities—lowered their target prices.
Shinhan Securities set the lowest target price, cutting it 34.8% to 150,000 won from 230,000 won. Hyundai Motor Securities and Daishin Securities lowered theirs to 160,000 won, while Samsung Securities set its target at 166,000 won. SK Securities set a target of 180,000 won, iM Securities 190,000 won and Kiwoom Securities 195,000 won. All seven firms, however, maintained their “Buy” ratings.
The starting point for the string of target-price cuts was results that fell short of market expectations. Hyundai Rotem’s third-quarter revenue was 1.6207 trillion won, up just 0.1% from a year earlier. Operating profit fell 11.1% to 247.1 billion won, about 10% below market forecasts. Analysts attributed much of the slowdown in revenue growth to the stronger won.
Profitability in the defense business nevertheless improved. Its operating margin rose to 28.1%, up 3.6 percentage points from 24.5% in the previous quarter. Analysts said profitability recovered as deliveries began for the second batch of K2 tanks under the contract with Poland.
The challenge is securing new orders to support next year’s results. Production of the second batch under the Polish contract is proceeding normally, but delays in signing follow-on contracts have increased the likelihood that growth in the defense business will slow next year. A decline in export volumes and a larger share of domestic business, which is relatively less profitable, could also put pressure on operating margins.
Lee Dong-heon, a research fellow at Shinhan Securities, said, “The defense operating margin rebounded as production under the second Polish contract stabilized, but additional orders are key.” He added, “Confirmation of the timing of the third Polish contract will be the starting point for a re-rating.”
Earnings forecasts are also being lowered one after another. Shinhan Securities cut its forecast for next year’s operating profit by 23.9%, from 1.287 trillion won to 979.2 billion won. Kiwoom Securities also lowered its forecast for next year’s operating profit by 20.4%, factoring in delays in new orders and a larger share of domestic mass production.
The timeline for overseas orders is also uncertain. Negotiations on a third contract with Poland are targeted to begin within the year, but discussions remain over the scope of technology transfers and local production. The contract for the tank project in Peru has been delayed due to a change in the local government and budget issues, while the Iraq project is also facing difficulties in making progress in negotiations amid instability in the Middle East.
Lee Han-gyeol, a researcher at Kiwoom Securities, said, “New order wins in the defense business have been weak this year.” He explained, “A considerable number of the order projects expected to be secured within the year are likely to be pushed back to next year.”
There is still room for earnings forecasts to rise again if new orders begin to come in in earnest. Analysts say that if the third Polish contract and the Peru project take shape, the company could secure production volumes for next year and ease the pressure on profitability from a lower export share.
The researcher said, “The second-phase Polish K2 project is progressing smoothly, but the company has been struggling to secure new orders needed for further growth.” He added, “Negotiations are under way on tank projects in key markets such as Peru and Iraq, so it is worth watching for future order wins.”
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