Earnings Stability to Stand Out
The author is an analyst of KB Securities. He can be reached at cm.lee@kbfg.com. -- Ed.
Maintain BUY, target price of KRW950,000
We maintain BUY and TP of KRW950,000 on Samsung SDI. Our DCF-based TP assumes 8.81% WACC (9.08% COE, 4.30% after-tax COD, 0.99 60m adj. beta), represents 30.2x implied 12m fwd P/E, 3.48x P/B, 10.2x EV/EBITDA and has 57.5% upside (vs. Jan 4 close).
4Q22 preview: EV battery earnings run to continue; Electronic Materials revenue to rebound
We forecast 4Q22 revenue at KRW5.73tn (+50% YoY) and OP at KRW597.7bn (+125% YoY; 10.4% OPM). Although we find avg. KRW/USD somewhat disappointing (1,362 in 4Q22 vs. 1,339 in 3Q22), we expect 4Q22 performance to be better than the record-high results achieved in 3Q22 given that (1) the mid/large-size EV battery segment benefits from both continually strong demand and Gen 5 batteries’ growing revenue proportion and (2) Electronic Materials revenue should recover from its 20% QoQ drop in 3Q22 (weak downstream demand) with a 16% QoQ rise due to client diversification. Profits are clouded by uncertainty due to potential one-off costs (e.g., bonus payments, disposal of unusable assets, quality-related loss provisioning).
Recent drop in stock price seems excessive; earnings stability to stand out
Samsung SDI stock fell 17% in the past couple months amid bearish performance for battery stocks due to concerns over the slowing economy hitting downstream demand. Apart from unfavorable FX rates, company fundamentals should be largely unfazed, which suggests the decline was excessive; unlike at other battery manufacturers, which are seeing signs of demand weakening, profit margins at Samsung SDI are undeniably improving thanks to (1) solid EV battery demand from BMW and (2) Gen 5 batteries’ growing revenue proportion. Also, we see positive momentum from additional clients and overseas investment amid conservative capex trends and challenges presented by the U.S. Inflation Reduction Act. Samsung SDI is our top pick for the secondary battery sector.