Although the defense stock craze continues in the stock market, the stock price of Poongsan, the only domestic ammunition manufacturer, has not kept up with other defense stocks. Recently, Poongsan's stock price has also risen significantly, but the increase is not substantial compared to Hanwha Aerospace, Hyundai Rotem, and LIG Nex1. As the undervaluation of Poongsan continues, there are projections in the securities industry that the company's partitioning plan, which was announced in the past but retracted due to shareholder opposition, may be discussed again.

Poongsan operates two businesses: the non-ferrous metal business, which processes copper, and the defense business, which manufactures ammunition. The problem is that proceeding with both the rapidly growing defense business and the stagnant copper business leads to management inefficiencies, which in turn results in undervalued stocks.

This is why Poongsan has been receiving questions about the possibility of partitioning at every corporate presentation (IR) aimed at institutional investors, responding that it is "considering it to enhance shareholder value." In this context, the company noted, "We have been considering partitioning for a long time, but nothing specific is being discussed or pursued at the moment."

The Poongsan exhibition hall appears at the Defense Industry Exhibition (DX KOREA)./Courtesy of News1

Nevertheless, as defense stocks have recently seen a price surge, inquiries about the possibility of partitioning from the company have reportedly increased. This indicates that investors are paying significant attention to the potential for Poongsan's partitioning.

The industry believes that if Poongsan decides to partition again, it is likely to pursue a spin-off. Given the negative views on a material partition that would leave only the shell of the surviving company while extracting only the growth business, Poongsan has experience of retracting a material partition plan announced in 2022 after facing shareholder backlash.

In 2022, Poongsan announced a plan to partition its defense division into Poongsan Defense. At that time, Poongsan stated that it would keep Poongsan Defense unlisted after the material partition to prevent the existing shareholder value from being compromised. The listing of the partitioned Poongsan Defense was to be secured as a special resolution of the shareholders' meeting to alleviate shareholder concerns. However, amid a sharp decline in stock prices, shareholder backlash continued, and the company ultimately withdrew its partition plan.

Meanwhile, this year, the stock market has witnessed a surge in prices for the defense sector. Stocks such as Hanwha Aerospace, Hyundai Rotem, and LIG Nex1 have seen tremendous rises this year. As the U.S. supported allies with security, using it as leverage to increase trade pressures, European countries began to ramp up military spending, benefiting Korean defense companies with an influx of work.

Graphic=Son Min-kyun

Hanwha Aerospace, which was around 350,000 won at the beginning of the year, has seen its market capitalization surpass Hyundai Motor, edging towards becoming a "prince stock" (a stock priced over 1 million won). Over the past six months, Hyundai Rotem's stock price has nearly risen by 300%, and LIG Nex1's stock price has doubled compared to the beginning of the year.

Although Poongsan, traditionally considered a defense stock, has seen its stock price rise, the increase has not been significant compared to other defense stocks. The stock price of Poongsan, which was about 50,000 won at the beginning of the year, has now surpassed 100,000 won, but experts analyze that it is still undervalued compared to other defense stocks.

Lee Jae-kwang, a researcher at NH Investment & Securities, noted, "The average 12-month forward price-to-earnings ratio (PER) of the top five domestic defense stocks, excluding Poongsan, is about 30 times, but Poongsan is only at 9 to 10 times."

An easy way to resolve the undervaluation of Poongsan is to separate the two differently characterized businesses and establish a separate company. Unlike a material partition, a spin-off would provide the new company’s stocks to existing shareholders in the same ratio, allowing the two entities to be valued according to the business they are in.

In addition, Poongsan already has a holding company system that follows Ryu Jin, chairman of Poongsan, to Poongsan Holdings and then to Poongsan. Recently, in the case of PharmaResearch, which announced a spin-off, there was strong backlash from shareholders due to deciding a partitioning ratio favorable only to major shareholders, but for Poongsan, there is not much concern about a change in management rights after the spin-off.

Industry insiders analyze that one of the reasons Hanwha Aerospace became a leading defense stock is its decision to spin off non-core businesses such as CCTV and precision machinery last year. Hanwha Aerospace implemented a spin-off to separate Hanwha Vision (CCTV) and Hanwha Precision Machinery (semiconductor manufacturing equipment) last year. The partitioning ratio based on net worth between Hanwha Aerospace and the newly established holding company was 9 to 1. This allowed Hanwha Aerospace to strengthen its identity as a defense enterprise.

An industry insider said, "How the company decides on partitioning will have the greatest impact on Poongsan's stock price moving forward."