Hanwha Techwin cuts Korea Aerospace stake

Korea executes Asia’s first major ECM deal of 2016 as Hanwha Techwin sells stake in Korea Aerospace following the elapse a four-year sale ban.
Korea Aerospace-developed T-50 jet fighters
Korea Aerospace-developed T-50 jet fighters

Hanwha Techwin got Asian equity capital markets off and running in 2016 on Tuesday by launching a secondary sale of shares in Korea Aerospace Industries worth $235 million.

Hanwha Techwin, a Korean security equipment manufacturer, initially offered half of its 10% stake in the government-controlled aircraft and satellite manufacturer at an indicative price range of W71,700 to W74,800 per share once the sale opened for subscription at around 5pm Seoul time.

As such, the 4.87 million shares were offered at a 3% to 7% discount to the stock’s close on Tuesday of W77,100, a source familiar with the matter said.

At that time the sale would have raised as much as W365 billion ($307 million).

But before midnight in Asia, the seller decided to reduce the size of the selldown to 3.9 million shares, or 4% of KAI's share capital. Bookbuilding was extended to 11am New York time.

Eventually the shares were priced at the bottom of the range at W71,700, representing a 7% discount to the last close. 

Hanwha Techwin’s share sale in KAI is the largest block trade in Korea since Nexon sold shares in mobile game developer NCsoft in a $533 million deal in October last year.

The sale was executed even though shares in KAI have drifted down towards two-month lows in recent weeks, in line with broader market weakness. That said, the shares are still 94% higher than at the beginning of 2015, outperforming the benchmark KOSPI index, which has traded largely flat over the same period.

Tuesday’s deal could be the first of a series of share sales in KAI following the expiry of a four-year ban at the end of last year.

When KAI first listed in 2011, the company's controlling shareholders -- Korea Development Bank, Hanwha Techwin, Hyundai Motor, and DIP Holdings -- agreed not to sell their shares until the end of 2015 unless done through a mutually agreed joint block sale.

The four launched an open auction to sell their shares collaboratively in 2012 but their efforts proved in vain because only one bidder expressed an interest. According to Korean regulations, government stake auctions require at least two bidders.

Solid prospects

By moving swiftly to execute a trade just two days after the partial moratorium ended, Hanwha Techwin looks set to avoid some of the share price fluctuations that could accompany future divestments made by other key shareholders.

For research analysts, nonetheless, KAI shares remain a safe bet as the economic uncertainties gather. Among 22 analysts that cover KAI, 20 have a 'buy' recommendation with an average 12-month price target of W114,462 -- some 48.5% higher than the current market price.

Defence industry stocks deserve a premium over other emerging market industrial plays because they tend to be less vulnerable in the face of slowing economic growth, lower oil prices, and rising US interest rates, Samsung Securities analyst Youngsoo Han wrote in a research note last month.

KAI also has high earnings visibility this year because new jet fighter orders from Korea’s KF-X military programme are expected to be finalised. Under the programme, Korea and Indonesia will jointly invest roughly $7.6 billion in developing advanced KF-X fighters.

The project is expected to create about 40,000 to 50,000 jobs and contribute to around W6 billion worth of revenue for KAI in early 2016, nearly three times its W2.2 billion new order value last year, according to NH Investment & Securities analyst John Yu.

JP Morgan and Hanwha Investment & Securities were the joint placing agents of the transaction.

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