HD Hyundai Heavy Named Top Pick as Naval Business Eyes U.S. Market

HD Hyundai Heavy Industries has been named the top pick in the shipbuilding sector, backed by strong earnings performance and expectations for overseas business expansion. Analysts project further earnings growth if the company wins the U.S. next-generation auxiliary vessel contract following its merger with HD Hyundai Mipo announced last year.

iM Securities said in a report on Monday that it maintains a "Buy" rating on HD Hyundai Heavy Industries and raises its target price by 28.7% to 860,000 won. The brokerage designated the stock as its "Top Pick" in the shipbuilding sector.

HD Hyundai Heavy Industries' fourth-quarter revenue of 5.19 trillion won met market expectations, but operating profit of 575 billion won fell 21.9% short of consensus estimates. One-time gains included favorable foreign exchange effects and change orders from the Shenandoah regional construction project. Cost factors included performance bonuses, though specific amounts were not disclosed.

The full-year operating profit margin of 11.6% is considered high compared to peers, which posted margins in the 8% range last year. iM Securities noted that "one-time costs exceeding 100 billion won were likely reflected" regarding the bonus payments.

By segment, the offshore division achieved a record-high operating margin of 17.5%, boosted by change order effects. The engine and machinery division posted a solid 18.4% margin despite some revenue being deferred to this year. The core merchant ship division's margin slipped to 11.9% from 12.9% in the previous quarter. iM Securities noted that "former HD Hyundai Mipo's results have been consolidated into HD Hyundai Heavy Industries since December last year," adding that "considering HD Hyundai Mipo's lower margins, this is a solid performance."

Expectations are also rising for the overseas naval vessel business alongside the earnings improvement trend. HD Hyundai Heavy Industries has filled more than 80% of its production slots through 2028, compared to 50-70% for competitors, indicating a stable order backlog.

Prospects for overseas naval contracts are also supporting share price upside. Results from the U.S. next-generation auxiliary vessel bid, submitted jointly with Huntington Ingalls Industries, are expected as early as the first half of this year. A successful bid would mark the company's full-scale entry into the U.S. naval market.

iM Securities also highlighted that HD Hyundai Heavy Industries has set this year's naval business order target at $3 billion, double last year's level. The report stated that "backed by a solid order backlog and earnings strength, we expect the stock's downside to be well-supported while leaving ample room for upside as the naval business progresses."