Daewoo International signed a contract with the Indonesian Defense Ministry to supply $700 million worth of 6×6 light-armored vehicles to the Indonesian Army. The production will commence at Doosan DST.
The contract is likely to increase opportunities for POSCO (PKX) to export light-armored vehicles in the international arena, especially in the Asian and Latin American countries.
In a separate contract, Daewoo International also agreed to supply $800 million worth of Type-209 submarines to the Indonesian Navy and $400 million worth of basic training aircraft to the Indonesian Air Force.
Daewoo International was acquired by POSCO in September 2010, for a value of KRW 3.37 trillion. The purchase price was 2.5% lower than POSCO’s original offer of KRW 3.46 trillion. POSCO, by means of the acquisition, aimed at growing its business in unexplored areas, securing a stable procurement of raw materials, and further strengthening its foothold in the overseas markets.
We find POSCO well positioned to leverage from its expansion into the fast-growing markets in the long run. Its recent joint ventures (Krakatau Steel), acquistions (Daewoo International), and increasing independency in raw material procurement (stake acquisition in Australia’s iron ore and coal mines) are very likely to be the company’s prime growth drivers.
With the gradual global economic resurgence, demand for steel is most likely to escalate and grow 13.1% in 2010 and 5.3% in 2011, according to the World Steel Association. Despite these positive factors, growth in the quarters ahead will be restricted as the company would probably face headwinds emanating from its rival steel manufacturers worldwide, including Arcelor Mittal (MT), Nippon Steel Corp. and privately held Hyundai Steel Company.
We currently maintain a Neutral recommendation on POSCO, also supported by Zacks #3 (Hold) Rank.
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