Mirae Asset Securities logo

Earnings to level up

W3.7tr export contract with Iraq secured

On Sep. 20, LIG Nex1 signed a W3.7tr contract to export KM-SAM II air defense systems to Iraq. The contract value is 6% higher than the previously reported figure (W3.5tr). Iraq has reportedly ordered eight batteries, with three requested for expedited delivery. However, we conservatively assume a seven-year delivery timeline with revenue recognition starting in 2026, considering: 1) uncertainties over contract details and the exact number of units to be delivered; and 2) the use of a progress-based revenue recognition method. Consequently, we expect the firm to recognize revenue sequentially from the UAE (starting in 2024), Saudi Arabia (starting in 2025), and Iraq (starting in 2026).

Stock undervalued relative to future revenue potential

We expect revenue to at least double as the KM-SAM II export business gains traction. We see related export revenue surging from 2025 to 2028 (based on project progress), reaching a peak of W2tr by 2028-29. For comparison, over the past decade, annual domestic revenue has averaged W1.5tr, with overseas revenue ranging from W200bn to W400bn. We forecast total revenue to grow at a CAGR of 24.4% through 2027.

We anticipate even more significant bottom-line improvement. Assuming an OP margin of 20-25%, KM-SAM II exports are likely to add W400-500bn to annual operating profit at the time of peak sales. This is 2.4 times higher than total operating profit in 2023 (W186.8bn).

As earnings increase, valuation should become more attractive. The stock is currently trading at a 12-month forward P/E of 19x, but the multiple based on projected earnings in 2027 is only 10x. Notably, future growth should be driven not only by KM-SAM II exports but also by domestic projects, including mass production of long-range surface-to-air missiles (LSAMs) and low-altitude missile defense (LAMD) systems. We also note other potential export deals in the pipeline, including for K-SAAM/KM-SAM II systems to Malaysia (2024-25), Poniard surface-to-ship missiles to the US (2025), and KM-SAM II systems to Saudi Arabia (2027-28); if these deals materialize, the firm’s medium/long-term fundamentals should strengthen further.

Lift TP to W269,000; maintain Buy

We reiterate Buy on LIG Nex1 and lift our target price by 5% to W269,000. We derived our target price by applying the average P/B multiple of global peers (3.7x) to our average 2025-26F BPS of W73,151. With order backlog being equivalent to eight years of revenue, we think investors can secure stable returns over a long-term horizon.