The author is an analyst of Shinhan Investment Corp. He can be reached at firstname.lastname@example.org. -- Ed.
1Q20 preview: Earnings to meet market consensus
Samsung Biologics is expected to have reported operating profit of KRW41bn (positive swing YoY, operating margin of 20.4%) on sales of KRW201.4bn (+60.7% YoY) for 1Q20, coming in line with the market consensus of KRW43.1bn.
The company likely saw higher capacity utilization rates compared to 4Q19, with the first plant running at 77%, the second plant at 79%, and the third plant at mid-10% levels. Average selling price at plants is estimated to have fallen back to normal levels after rising temporarily in 4Q19 when production was concentrated on high-priced products. Samsung Bioepis (50% stake) turned to profit in 2019 and is forecast to continue on a solid uptrend backed by growing sales of biosimilar drugs.
Solid earnings growth seen for 2020 on rising capacity utilization of the third plant
For 2020, we project sales of KRW897.9bn (+28.0% YoY) and operating profit of KRW186.4bn (+103.1% YoY, operating margin of 20.8%). Lost sales from regular maintenance of plants (every two years) should be limited this year unlike in 2019. Annual average capacity utilization of the first and second plants is estimated at 64% and 79%, respectively. With the third plant’s utilization rate rising to 24%, Samsung Biologics should enjoy both sales growth and operating leverage effect. Equity method gains from Samsung Bioepis are expected to increase on earnings improvement.
Retain BUY for a target price of KRW570,000
We retain our BUY rating on Samsung Biologics for a target price of KRW570,000. Investment points are: 1) earnings growth from CMO (contract manufacturing organization) on rising capacity utilization of all plants; 2) new business momentum from CDO (contract development organization) and CRO (contract research organization); and 3) solid top-line growth of Samsung Bioepis’s biosimilar business. At last week’s general shareholders’ meeting, the company expressed commitment to bring the third plant up to full capacity by 2022. With CMO demand likely to rise steadily alongside the fast-paced growth of the biosimilar market, expectations remain intact for capacity additions at the fourth plant.