The author is an analyst of NH Investment & Securities. He can be reached at email@example.com. -- Ed.
Short-term impact of Covid-19 unavoidable, but expect mid/long-term growth on digital transformation
Given the Covid-19 outbreak, executions of new projects are to be delayed. That said, we point out that two-thirds of sales at Samsung SDS’s IT services division are generated from recurring outsourcing services. In addition, expectations towards mid/long term earnings growth at the IT services arm’s strategic businesses remain valid in line with the acceleration of digital transformation at clients.
Fundamentals comparatively solid; digital transformation at clients to accelerate
Amid Covid-19 related economic uncertainties, Samsung SDS’s comparatively (vs rivals) solid fundamentals stand out. Over the near term, the firm needs to contend with: 1) delays in the execution of new IT services projects; and 2) slowed growth in obtaining new non-captive clients. That said, we point out that two-thirds of sales at the IT services division are generated from the outsourcing of IT services that are essentially required for clients in order to operate their businesses. And, possessing W3.8tn worth of net cash, Samsung SDS is not facing financial risks.
Influenced by the Covid-19 outbreak, telecommuting and working online are to become increasingly important going forward. Accordingly, we expect to see an acceleration in the digital transformation (building of non-face-to-face economic infrastructure) of society moving forward. Following Samsung Group, the LG and SK member companies are transitioning towards cloud-based operating environments. Going forward, the utilization of cloud-based solutions is to become widespread in both the private and the public spheres. Given such, we view expectations towards mid/long term earnings growth at Samsung SDS’s IT services arm’s four strategic businesses (intelligent factory, cloud services, analytics, and solutions) as remaining valid.
Although adhering to our Buy rating, we lower our TP from W270,000 to W210,000, taking into account: 1) downward adjustments to our earnings forecasts; and 2) share price adjustments for the firm’s peer group, with the target EV/EBITDA multiple adjusted from 12.8x to 10.1x (a level reflecting a 10% premium to the peer group average). Of note, we have cut our 1H20 sales and OP projections by 8% and 24%, respectively, reflecting the negative impact of the Covid-19 outbreak in terms of both: 1) normally generated sales; and 2) delays in the booking of sales from new projects.
Covid-19 induced earnings sluggishness to continue until at least end-1H20
We now forecast overall consolidated 1Q20 sales of W2,390.8bn (-5% y-y) and OP of W164.8bn (-17% y-y), with both figures to come in below consensus.
We estimate that 1Q20 sales for the IT services division will drop to W1,351.7bn (-5% y-y), weighed upon by: 1) languid sales at its intelligent factory business; 2) delays in sales generated at planned projects; and 3) difficulties in securing greater numbers of new non-captive clients. Accordingly, we believe that the IT services division’s 1Q20 OP will fall to W159.6bn (-18% y-y; OPM of 11.8%). Given the presence of negative seasonality (1Q), OPM at the logistics BPO division is to be held to a tepid 0.5% (OP of W5.2bn, +18% y-y).