Nomura initiates Hyundai Rotem stock with Buy rating, sees 30% upside

Nomura/Instinet initiated Buy coverage on Hyundai Rotem (KS:064350) with a KRW260,000 price target, representing approximately 30% upside, citing the company's significant undervaluation relative to its robust overseas order pipeline. The firm highlighted Hyundai Rotem's 2025 forward P/E of 22.8x, which is substantially below both Korean and global peers, and its market capitalization to 2025 forecast backlog ratio also indicates significant undervaluation against competitors like Hanwha Aerospace and Rheinmetall. However, potential downside risks include delays or cancellations of anticipated Middle East orders.

Analysis

Nomura/Instinet has initiated coverage on Hyundai Rotem Co Ltd (KS:064350) with a 'Buy' rating and a KRW260,000 price target, implying approximately 30% upside from current trading levels. The core of the investment thesis is the company's significant undervaluation relative to its overseas order pipeline and industry peers. The stock trades at a 2025 forward price-to-earnings (P/E) ratio of 22.8x, a steep discount of 45.1% to its Korean counterparts and 33.0% to global competitors. Further supporting the undervaluation claim, Hyundai Rotem's market capitalization to 2025 forecast backlog ratio is 28.4% below Hanwha Aerospace and 63.1% below Rheinmetall. Nomura's price target is derived from a 30.8x multiple on forward EPS, which incorporates a 10% discount to the global peer average to account for potential dilution from its Rail Solution and Eco Plant divisions. However, the outlook is not without risk; the analysis identifies potential delays or cancellations of large Middle East orders as a key vulnerability that could pressure operating profits in 2027, alongside the risk that new contract values may not meet forecasts.

Key Decisions for Investors

• Given the significant undervaluation identified by Nomura based on forward P/E and order backlog metrics, investors may view the initiation of 'Buy' coverage as a catalyst and a potential entry point for exposure to the Korean defense sector.
• Investors must closely monitor the company's progress in securing and executing its Middle East orders, as any delays or cancellations represent the primary identified risk that could negatively impact future profitability and invalidate the current price target.
• It is advisable to track the valuation gap between Hyundai Rotem and its global peers, such as Hanwha Aerospace and Rheinmetall, as a narrowing of this discount would serve as a key indicator that the market is beginning to recognize the company's value.