Profitability to Improve on Growing Income from Cloud
The author is an analyst of KB Securities. He can be reached at joonsop.analyst@kbfg.com. -- Ed.
Maintain BUY but lower our target price to KRW175,000
We maintain BUY but lower our TP from KRW190,000 to KRW175,000 on Samsung SDS based on the following. (1) Our COE assumption was raised (8.45→9.12%) and the impact of the domestic/overseas economic slowdown on IT Services/Logistics earnings was taken into account. (2) With cost of capital rising, Samsung SDS’ cash assets (3Q22 consolidated net cash of KRW4.37tn) should stand out. (3) Margins should improve on a rise in earnings proportion for Cloud (IT Services).
4Q22 preview: OP to meet market consensus
We forecast 4Q22 revenue/OP at KRW4.14tn (+5.1% YoY)/KRW199.6bn (+38.6% YoY), both of which meet the market consensus (revenue/OP of KRW4.05tn/KRW214.3bn; 3m basis). We estimate IT Services revenue/OP of KRW1.53tn/KRW150.4bn and Logistics revenue/OP of KRW2.61tn/KRW49.6bn. IT Services OP should grow 20% QoQ on the base effect from one-off costs, but Logistics revenue/OP should edge down following normalization of freight rates.
Value of net cash assets highlighted
This year, higher interest rates and domestic/overseas economic slowdown should highlight the value of Samsung SDS’ cash assets. As of 3Q22, the company had consolidated net cash of KRW4.37tn (cash equivalents/short-term financial assets of KRW2.68tn), 2021 EBITDA of KRW1.3tn and annual cash inflow of over KRW700bn.
Profitability should improve on growing income from Cloud
We believe a rise in earnings proportion for Cloud should drive up the stock price this year. In 2022, increased investments in Cloud (education, infrastructure) hit profitability. This year, however, full-fledged operations at Dongtan data center (CSP) and MSP expansion should improve profitability.