[Weekend Money] Defense Stocks Face "Across-the-Board Target Price Cuts," but Major Year-End Events Are Coming...

Third-quarter earnings expected to soften... all five major companies forecast to miss consensus
"Earnings concerns already priced in... watch for major orders from year-end through 2027"

Expectations surrounding defense stocks have cooled. With third-quarter results for 2026 expected to fall short of market expectations, analysts have lowered their target prices across the board for major defense stocks, including Hanwha Aerospace and Hyundai Rotem. However, analysts say current share prices already reflect concerns about earnings, and investors should take note of the major order events expected to be concentrated from the end of this year through 2027.

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According to Eugene Investment & Securities, the third-quarter 2026 results of five major South Korean defense companies are generally expected to fall short of market expectations. Hanwha Aerospace, LIG Defense & Aerospace (LIG D&A), Hyundai Rotem, Korea Aerospace Industries (KAI), and Hanwha Systems are all forecast to report operating profits below analysts' consensus estimates.

This is due to a decline in the won-dollar exchange rate compared with the end of the first half, which reduced export profitability, and delays in the recognition of revenue from some export deliveries. Concentrated development spending in the second half is also weighing on earnings.

Accordingly, Eugene Investment & Securities lowered its target prices for all five companies. The target for Hanwha Aerospace was cut from KRW 1.86 million to KRW 1.66 million, LIG D&A's from KRW 1.2 million to KRW 1 million, Hyundai Rotem's from KRW 316,000 to KRW 220,000, KAI's from KRW 159,000 to KRW 146,000, and Hanwha Systems' from KRW 140,000 to KRW 100,000. Yang Seung-yoon, a researcher at Eugene Investment & Securities, said, "We have factored in changes in earnings and valuation multiples for the defense stocks we cover."

By company, Hanwha Aerospace's third-quarter revenue is estimated at KRW 7.0299 trillion, with operating profit of KRW 974.3 billion. These figures represent increases of 8% and 16%, respectively, from the same period last year, but operating profit is expected to fall well short of the market estimate of KRW 1.2132 trillion. This is largely because delivery of the second batch of K-9 self-propelled howitzers to Poland is concentrated in 2027, delaying recognition of some revenue.

LIG D&A is forecast to post revenue of KRW 1.2223 trillion and operating profit of KRW 87.5 billion. Revenue is expected to rise 16%, while operating profit is projected to decline 2%, falling short of the market estimate of KRW 107.2 billion. With annual research and development expenses expected to reach KRW 250 billion to KRW 350 billion, cumulative spending in the first half was only in the KRW 60 billion range, pointing to a heavier cost burden in the second half. Key factors include the preliminary development of weapon systems and development costs related to exports.

Hyundai Rotem is estimated to record revenue of KRW 1.8849 trillion and operating profit of KRW 268.6 billion in the same period. Revenue is expected to rise 16%, while operating profit is projected to fall 3%. Although slightly below the market estimate of KRW 276.4 billion, the figure is broadly in line with expectations.

KAI is estimated to post revenue of KRW 1.1953 trillion and operating profit of KRW 77 billion. These represent increases of 70% and 28%, respectively, from the same period last year, but operating profit is expected to fall short of the market estimate of KRW 81.7 billion. Hanwha Systems is estimated to report revenue of KRW 1.0604 trillion, up 31%, and operating profit of KRW 51.3 billion, up 128%. Its operating profit is also expected to fall short of the market estimate of KRW 60.6 billion. In addition to the development cost burden in the second half, the use of up Poland-bound component supplies is expected to affect results.

Despite lowering target prices to reflect weak earnings, the brokerage maintained a 'Buy' rating on all five companies. Analysts are focused not on third-quarter results, but on the next order cycle. With South Korean defense companies' earnings having entered a period of stagnation following the major orders secured in 2022, analysts say new contracts will be the key factor determining share price direction. Yang said, "The recent decline in defense stocks has already priced in concerns about third-quarter results. New orders will ultimately determine the direction of share prices. Major order events are concentrated from the end of this year through 2027."

The most closely watched development is defense cooperation with the United Arab Emirates (UAE). Eugene Investment & Securities highlighted the possibility that contracts related to defense cooperation worth about $35 billion could take concrete shape in connection with the UAE president's state visit to South Korea. However, given the already high market expectations, the brokerage said it will be important to confirm the actual terms and scale of any contracts. The report listed K-9 self-propelled howitzers, Chunmoo multiple rocket launchers, medium- and long-range surface-to-air guided weapons, counter-drone and short-range air defense systems, KF-21 fighter jets, and frigates as potential UAE projects. These are estimates based on assumptions about procurement volumes and project costs, and should be distinguished from the value of confirmed contracts.

In Europe, the third contract for K2 tanks with Poland is a key variable. Eugene Investment & Securities highlighted the possibility that Hyundai Rotem could secure a third order from Poland in the first half of 2027. Discussions on industrial cooperation with Romania are also continuing, while orders for ground weapons systems from Peru could advance following a high-level meeting at the end of this year. LIG D&A is expected to see exports to Saudi Arabia in 2027 and Iraq in 2028 contribute to its earnings. Hanwha Aerospace is also seen as having a large pipeline of potential orders for air defense and ground weapons systems in the Middle East.

Yang said, "We believe this is the time to look past weak third-quarter results as short-term noise and position for 2027, when orders are expected to be concentrated. The recent share price decline has also significantly eased valuation concerns."

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