[Click eStock] "M&C Solution, Operating Leverage Effects Emerging"

On August 25, Hanwha Investment & Securities analyzed that M&C Solution recorded strong results in the second quarter of this year, with the effects of operating leverage starting to materialize in earnest.

M&C Solution posted sales of KRW 97.4 billion in the second quarter of this year, marking a 28.0% increase compared to the same period last year. Operating profit reached KRW 13.4 billion, up 56.9%, achieving an operating profit margin (OPM) of 13.8%. Despite the expansion of domestic ground weapons maintenance and mass production of guided weapons, the export ratio stood at 48.9%. In addition to exports of K9, Cheonmu, and K2 to Poland, the company also added various export volumes, including K9 to Egypt and Cheongung-II to the UAE.

Bae Seongjo, a researcher at Hanwha Investment & Securities, stated, "Although the export ratio for the second half of this year is expected to decrease to 50.8% from 52.4% in the same period last year, the OPM has improved by 5 percentage points (from 8.3% to 13.3%)," explaining that the effects of operating leverage are becoming evident. In particular, the export OPM for the second quarter is estimated to be 20%, which is attributed to the increase in localization rates and the effect of a weaker exchange rate.

Over the next two to three years, M&C Solution is expected to achieve significant growth in both indirect and direct exports. Researcher Bae projected, "The company exclusively supplies its main products to client companies, giving it strong pricing power. As repeat exports to the same clients increase, direct export cases (with higher profitability) are expected to rise." In fact, in May, for the second export contract of K9 self-propelled howitzer parts to India (worth KRW 10.5 billion), the company signed a direct export contract with India’s L&T, not Hanwha, confirming improved profitability.

M&C Solution also holds a comparative advantage over overseas competitors in terms of delivery time. Currently, the servo valves, suspension systems, and gun/turret drive systems produced by the company are experiencing shortages in Europe, the Middle East, and Asia. The company demonstrates strengths in production capacity and workforce flexibility. Researcher Bae commented, "The company has recently accelerated its response to demand by upgrading performance equipment, utilizing outsourced processing companies, and leasing three external test sites. An announcement of an MOU related to direct exports is expected within the year."

Amid the recent correction in the defense sector stock prices due to the Russia-Ukraine ceasefire negotiations, this adjustment is being viewed as a buying opportunity. Researcher Bae predicted, "Whether a ceasefire will be reached within the year remains uncertain, and even in the event of an unstable truce, Europe’s rearmament scenario will remain unchanged." Meanwhile, M&C Solution’s annual results for this year are projected to be sales of KRW 408.5 billion (+44.4%), operating profit of KRW 56.7 billion (+62.7%, OPM 13.9%), and an order backlog of KRW 1.1 trillion (+15%).

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