K-defense takes a breather in Q3 as year-end counteroffensive gathers pace

[Financial News] As the four South Korean defense firms saw their profitability deteriorate year on year in Q3, expectations are growing that it will improve significantly in Q4. With deliveries under overseas contracts concentrated toward year-end, their combined operating profit, which was in the 800-billion-won range in Q3, is expected to approach 2 trillion won in Q4.
According to regulatory filings from the companies on the 8th, the four defense firms—Hanwha Aerospace, Hyundai Rotem, Korea Aerospace Industries (KAI) and LIG Defense & Aerospace (D&A)—reported combined consolidated operating profit of 846.1 billion won in Q3. That was down 33.2% from 1.2671 trillion won in the same period a year earlier. Combined revenue for the period came to 9.8506 trillion won, virtually unchanged from 9.8574 trillion won a year earlier. In other words, they maintained their top line, but profitability fell sharply.
Analysts say the timing of deliveries of high-margin export orders contributed to the weak results. Defense companies produce weapons under contracts signed years earlier and recognize revenue after completing procedures such as delivery and inspection in accordance with the contract terms. Operating profit can also vary significantly depending on which quarter sees concentrated deliveries of overseas export orders, which are more profitable than domestic deliveries.
According to financial data provider FnGuide, the consensus forecast for the four defense firms’ combined Q4 operating profit was 1.97 trillion won, up 65.4% from the same period a year earlier. Compared with their actual Q3 results, that would represent a 132.8% increase in just one quarter. Combined revenue is also forecast to rise 17.5% year on year to 15.1814 trillion won.
Hanwha Aerospace is expected to drive the year-end rebound. Its Q4 operating profit is forecast at 1.4816 trillion won, an increase of 1.0296 trillion won from Q3. That would account for about 92% of the projected increase in combined operating profit for all four defense firms. Analysts say concentrated deliveries of K9 Thunder and K239 Chunmoo exports bound for Poland could boost not only revenue but also the share of high-margin exports.
KAI’s Q4 operating profit is also projected to rise to 144.1 billion won, helped in part by increased revenue from KF-21 Boramae production. Hyundai Rotem is expected to see a modest improvement, to 281.5 billion won. LIG D&A, by contrast, is forecast to post operating profit of 62.8 billion won, below its Q3 result, due to year-end cost pressures, including research and development expenses.
An industry official said, “Demand for defense products continues, particularly in Europe and the Middle East, so from now on, results will depend on how steadily companies can produce the orders they have secured and deliver them on time.”
[email protected] Jung Won-il Reporter