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Look ahead to 2026 and beyond

3Q25 review: OP misses consensus by 30%

For 3Q25, Korea Aerospace Industries (KAI) posted revenue of W702.1bn (-22.6% YoY; 33% below the consensus), operating profit of W60.2bn (-21.1% YoY; 30% below the consensus), and an OP margin of 8.6%. The results fell significantly short of expectations due to: 1) delayed recognition of light armed helicopter (LAH) revenue (from 3Q25 to 4Q25); and 2) slower revenue recognition for the FA-50PL (Poland) due to a delayed development schedule. There were no one-off expenses. On a positive note, OP margin was 0.4%p higher than expected despite increased in-house R&D spending. Looking to 4Q25, we expect both revenue and operating profit to recover, aided by domestic deliveries of seven to eight LAH units. That said, due to the FA-50PL development delay, we expect aircraft export revenue to miss the full-year guidance.

2026 outlook: KF-21 deliveries to begin; revenue likely to grow 43.6% YoY

We forecast 2025 revenue at W3.8tr, slightly below the company’s original guidance (W4tr), mainly due to slower revenue recognition for aircraft exports. However, we expect top-line growth to accelerate to +43.6% YoY in 2026, driven by initial deliveries of the KF-21 (eight units) and second-phase LAH mass production (up to 24 units). Progress in the FA-50M (Malaysia) program should allow aircraft export revenue to grow by more than 10% YoY, and the parts business should also see a rapid recovery.

We expect profitability to strengthen significantly in 2027-28 as multiple large export projects overlap and related revenue recognition accelerates.?The FA-50M and FA-50PL programs are on track for initial deliveries in 2H26 and 2027, respectively, while the FA-50PH program (Philippines) is scheduled to start deliveries in 2028. Although profitability in 2026 should remain solid thanks to domestic mass production programs, margins on domestic projects are normally capped at 8-12%, making exports the key driver of further earnings improvement.?Notably, KAI maintains a robust pipeline of export opportunities and is actively marketing the FA-50, KF-21, and Surion in countries such as Saudi Arabia, the UAE, Iraq, Egypt, the Philippines, Peru, and the US.

Maintain Hold rating and TP of W106,000

We maintain our Hold rating and target price of W106,000 on KAI.?A key potential catalyst is the US Navy’s Undergraduate Jet Training System (UJTS) program. The?RFP is scheduled for distribution in Dec. 2025, with contract signing likely in early 2027. Unlike the Advanced Pilot Trainer (APT) program, the UJTS prioritizes fast delivery and performance, giving KAI an edge over rivals facing production delays.?We also see re-rating potential if major export deals are secured with Saudi Arabia, Egypt, and Peru.