Operating profit rose 32%, but price targets are being cut one after another... What’s holding KAI back?

[Financial News] Korea Aerospace Industries (KAI) posted operating profit above market expectations in the third quarter, but securities firms are successively lowering their price targets. Improved profitability from the stronger won and the resumption of finished-aircraft exports are positives. However, with the company achieving only 20% of its annual order target, analysts say whether it can secure new contracts will determine the future direction of its share price.
According to financial information provider FnGuide on the 4th, four of the five securities firms that analyzed KAI’s results that day—DB Securities, SK Securities, Samsung Securities, Kiwoom Securities and Daishin Securities—lowered their price targets, with Samsung Securities the exception. Samsung Securities cut its target from 141,000 won to 124,000 won, while raising its investment rating from “Neutral” to “Buy.” Among the lowered targets, DB Securities’ 125,000 won was the lowest, while Kiwoom Securities’ 185,000 won was the highest.
KAI’s third-quarter revenue rose 51.6% year over year to 1.0643 trillion won. Operating profit increased 31.9% to 79.4 billion won, exceeding the market forecast of 75.3 billion won. The improvement was driven by lower costs for imported equipment as the won strengthened, which reduced estimated costs in the finished-aircraft export business. However, one-off costs of about 30 billion won, including provisions for bad debts related to the Iraq project, were also reflected.
Han Young-soo, a researcher at Samsung Securities, said, “The positive factors in these results were the successful securing of large-scale export orders and revenue growth of 52% year over year,” adding that “concerns over a gap in export orders will ease.”
Despite the improved results, a lack of new orders is seen as a concern. KAI’s order target for this year is about 10.4 trillion won, but cumulative new orders through the third quarter stood at 2.2 trillion won, or just 20% of the target. However, the market is anticipating a third-batch mass-production contract for the Light Armed Helicopter (LAH) worth about 3 trillion won and an KF-21 export contract with Indonesia, among other deals, in the fourth quarter.
Lee Han-gyeol, a researcher at Kiwoom Securities, said that “given the domestic and overseas projects expected to generate orders in the fourth quarter, KAI could come close to meeting its target for the year.” He said a key deal was a contract, currently under discussion with Indonesia, to supply 16 KF-21 fighter jets for about 4 trillion won.
The securities industry also expects earnings growth to gather pace starting next year. Domestic deliveries of the KF-21 are expected to expand, while revenue recognition from export projects to Poland and Malaysia is set to ramp up. Kiwoom Securities forecast that operating profit next year would reach 613.3 billion won, up 67.9% from its estimate for this year.
Researcher Han said, “KAI is also in a position to expect earnings growth similar to that of its competitors, starting from a low base,” adding that “the easing of valuation pressure following the recent share-price correction is also positive.”
[email protected] Bae Han-geul Reporter