"It's Too Late After Orders Are Announced... Now Is the Optimal Buying Window for Defense Stocks" [Weekend Money]

Second-Half Order Momentum to Accelerate, Led by Middle East Deals
Stocks Underperform Index... "Now Is an Optimal Buying Opportunity"

While K-defense stocks are underperforming the KOSPI index, analysts now suggest that the period before the acceleration of second-half order momentum is the “optimal buying opportunity.”

Kang Taeho, a researcher at DS Investment & Securities, noted, “We expect major orders to resume as early as July, and valuations have entered an attractive range, making this a highly favorable stretch for buying.” He added, “We recommend investors consider now as an optimal buying window, ahead of the materialization of the full order momentum.”

The so-called “Big Five Defense Companies” — Hanwha Aerospace, LIG Defense & Aerospace, Hanwha Systems, Hyundai Rotem, and Korea Aerospace Industries — have seen their share prices weaken. Kang attributed this to three major factors: the ongoing gap in large-scale contracts; heightened concerns about stricter NATO access barriers following Canada’s submarine order loss; and worries over delays in contracts destined for the Middle East as the regional war drags on. However, he predicted that share price gains would resume as major orders become concentrated in the second half of the year.

This month, several key developments are expected: selection of the K9 wheeled self-propelled howitzer as the preferred bidder in the U.S.; the signing of a joint development contract for the K9 with Spain; and the main contract for K2 tanks with Peru. Kang particularly highlighted the Spanish K9 deal, noting, “A joint development MOU has already been signed, and with Spain facing pressure to further boost its defense budget, the final contract is expected to be signed without much delay.”

He went on to say, “With ongoing Russian threats to Poland and the intensifying Russia-Ukraine war, ground weapons such as K9 and Chunmoo are urgently needed within NATO. As a result, rather than raising barriers to entry, we expect that NATO will strengthen joint development and other forms of defense cooperation.”

Kang added that if potential Middle Eastern defense contracts come into play, uncertainties around major second-half deals could be largely resolved. He explained, “It is estimated that major Middle Eastern countries have depleted their stock of ballistic missile interceptors, so interest in Korean air defense and interceptor missile systems is likely to remain high. After regional stabilization, we further expect renewed momentum in large-scale Middle Eastern deals such as the Saudi MNG project and Iraq’s K2 tank agreement.”

Although some companies’ earnings may fall below market expectations, Kang stated, “For defense companies, share price direction is likely to depend more on contract wins than current operating results.” He expects LIG Defense & Aerospace to deliver strong earnings based on UAE-bound Cheongung (M-SAM) missile sales. Second-quarter operating profit is expected to reach 114 billion won, exceeding the consensus forecast of 104.9 billion won.

For Hanwha Aerospace, he projects second-quarter operating profit to fall short of consensus, but expects a strong rebound: “There will be a concentration of K9, Chunmoo, and missile deliveries to Poland, while sales to Australia and Egypt will accelerate in the second half. As a result, annual operating profit for land defense is expected to reach 2.3 trillion won, delivering outstanding full-year results.”

Kang also noted, “Hyundai Rotem, Korea Aerospace Industries, and Hanwha Systems are expected to post second-quarter results below consensus, but their results are likely to improve as the year progresses into the second half.”

This content was produced with the assistance of AI translation services.