Poongsan Holds Up in Q3... Expected to Slow Through First Half of Next Year [Click eStock]

Third-quarter operating profit up 155.6% year over year
Copper offsets defense delivery disruptions
Weakness expected from fourth quarter as lower exchange rates weigh on results

Poongsan held up through the third quarter of this year, but its profits are expected to gradually decline. While rising copper prices drove its performance, analysts say the impact of a weaker won against the U.S. dollar and disruptions to ammunition deliveries will put the brakes on growth.

On November 4, Meritz Securities lowered its target price for Poongsan by 24.4% to KRW 75,000, citing these factors. The stock closed at KRW 60,300 the previous day, November 3. The brokerage maintained its “Buy” rating.

Poongsan’s consolidated operating profit for the third quarter was KRW 108.8 billion, up 155.6% from the same period a year earlier. Revenue rose 39.5% to KRW 1.6384 trillion.

However, the details tell a different story. Analysts say the two main pillars of its business—the copper-processing division and the defense division, which produces ammunition—moved in opposite directions. The defense division posted third-quarter revenue of KRW 331.6 billion, well below the company’s forecast of KRW 145.3 billion. This was because an explosion at customer Hanwha Aerospace continued to disrupt the supply of government-furnished materials, delaying revenue recognition for domestic large-caliber ammunition. Exports also fell short of expectations as shipments to the Middle East were delayed.

Copper made up the difference. In its non-ferrous metal business, which processes copper and copper alloys into products such as sheets and rods, sales volume fell about 3% from a year earlier, but revenue increased as the price of copper cathode, its raw material, rose. Operating profit came in at KRW 51.8 billion, exceeding market expectations. Overseas manufacturing and sales subsidiaries are also believed to have benefited from higher copper prices.

The outlook is expected to turn less favorable from the fourth quarter onward. Copper is traded in U.S. dollars, making exchange rates another variable. This could create an unfavorable gap between the cost of raw materials purchased earlier and the metal prices reflected in sales prices. The resulting loss, known as “metal loss,” is projected to rise from KRW 12 billion in the third quarter to KRW 40 billion in the fourth quarter, as the impact of the won’s appreciation will be reflected over the entire quarter.

The mix of defense products delivered is also a concern. If material shortages reduce deliveries of high-margin large-caliber ammunition, products with relatively lower profit margins will account for a larger share. Including year-end expenses, BNK Investment & Securities forecast that Poongsan’s operating profit would plunge to KRW 46.3 billion in the fourth quarter. It expects operating profit next year to fall about 19% from this year’s estimate to approximately KRW 299 billion. The calculation is based on the view that this year’s sharp profit growth will be difficult to sustain into next year. “There is a high likelihood of metal losses next year, and lower exchange rates are also expected to weigh on defense profitability,” said Kim Hyuntae, a researcher at BNK Investment & Securities. “With the issue of the explosion at a customer’s facility still unresolved, performance and earnings momentum will weaken.”

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