Expect Additional Disposal of Controlling Shareholders’ Stake
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Samsung SDS’s logistics BPO sales appear to have slowed from their previous peak. The firm is also facing both deteriorating business conditions for its IT service business and higher cloud service business investment costs. We expect the controlling shareholders’ stake to be further marshalled to pay inheritance tax. But, IT cloud solutions business-led growth and further M&As (wielding the firm’s ample net cash) are anticipated from 2H23.
Near-term business environment deteriorating; expect additional disposal of controlling shareholders’ stake
Affected by a rapid drop in freight rates, Samsung SDS’s logistics BPO sales appear to be slowing from their peak in 2Q22. We believe that margins are narrowing at Samsung SDS’s IT service business on a general decrease in IT industry investment (amid the ongoing global economic slowdown), increased labor costs, and a temporarily higher cost burden for expanding the company’s cloud solutions business. We estimate that Samsung SDS’s annual OP will grow 19% y-y in 2022 on both base effects (vs 4Q21) for its IT service business and high logistics growth, before then shrinking 6% y-y in 2023 on likely reduced logistics business earnings. However, both cloud solutions earnings growth at the IT service business and Dongtan data center operation effects should begin in earnest from 2H23.
As in the previous year, the controlling shareholder is expected to marshal an additional 3.9% of their stake to pay inheritance tax in Apr 2023. During this period, it will not be easy for Samsung SDS to use its ample net cash of W5tn to pursue additional M&A activity (in to strengthen its business competitiveness). However, we view potential overhang risk for the remaining stake (9.2%) after the likely disposal as being very low.
We lower our TP from W200,000 to W136,000, in turn downgrading our investment opinion to Hold. These changes reflect downward adjustments to our earnings forecasts, a change in the base year (2022 → 2023) for our TP calculations, and a change in our EV/EBITDA assumptions (discount rate vs peers: 30% → 50%) in consideration of overhang risk.
3Q22E: To show q-q slip in logistics BPO sales as expected, but larger-than-predicted drop in IT service earnings
We forecast 3Q22 sales of W3.8879tn (+15% y-y) and OP of W204.3bn (-8% y-y), with both figures missing consensus.
We expect the firm’s logistics BPO (3Q22E: sales W2.4429tn, +22% y-y) to show a q-q decline (as expected) on reduced freight rates, with OPM returning to 2% (OP W48.9bn, +23% y-y). Despite the high value-added cloud service's growth, margins at the IT service business (W1.445tn, +5% y-y) likely fell q-q on weak SI sales (amid a general reduction in IT industry investment), the reflection of higher labor costs, and investment expenditure for strengthening the company’s cloud service business (OPM 10.8%; OP W155.4bn, -15% y-y).