Set to Benefit from Clinical Trials for COVID-19 Treatment
The author is an analyst of NH Investment & Securities. He can be reached at william.ku@nhqv.com. -- Ed.
Samsung Biologics’ 1Q20 OP beat consensus by 46.2% thanks to rising utilization rates and reduced SG&A expenses. We raise our TP to reflect revised DCF valuation assumptions. We maintain a Buy rating, as the firm has already reached its annual order target for Plant #3, and expectations for orders for a Covid-19 treatment are valid.
Set to benefit from multiple clinical trials for Covid-19 treatment
We maintain a Buy rating on Samsung Biologics and raise our TP from W630,000 to W650,000. Since 4Q19, the firm has maintained a GPM of about 40%, with leverage effects rising in earnest thanks to increasing utilization rates. The company recently signed a supply contract (W440bn) for Vir Biotechnology’s Covid-19 antibody treatment, reaching its annual order target for Plant #3 eight months ahead of schedule. Expecting the firm to receive additional new orders, we maintain a Buy rating. In consideration of recent interest rate cuts and treasury bond interest rates, NH I&S Research Center’s risk-free rate assumption has been revised down from 2.0% to 1.5%. We size Samsung Biologics’ operating value (DCF method) at W32.6tn. When adding the value of its stake in Samsung Bioepis (W11.0tn; calculated by applying the six-month average P/E of 50x for Celltrion to the present value of Samsung Bioepis’s 2022F NP of W438.5bn), fair market cap for Samsung Biologics is estimated at W43.6tn.
1Q20 review: Earnings arrive sound on operating leverage effects and reduced SG&A expenses
Samsung Biologics posted consolidated 1Q20 sales of W207.2bn (+65.3% y-y) and OP of W62.6bn (TTP y-y; OPM: 30.2%), with sales meeting our estimate and OP topping it. We previously predicted that sales would inevitably decrease q-q due to a concentration of high-priced batch production schedules last quarter. However, as utilization rates at both Plant #1 and Plant #2 reached the 80% mark in 4Q19 (reflected in 1Q20 earnings), GPM proved to be 42.0% (-0.2%p q-q) thanks to the rise in utilization and accompanying operating leverage effects. Meanwhile, the utilization rate at Plant #3 was reported to be around 20%. SG&A expenses narrowed W0.6bn q-q to W24.5bn (SG&A ratio upped 3.8%p q-q) due to restricted outside activities amid the Covid-19 crisis. Equity-method losses of W17.0bn were booked due to increased unrealized losses on inventory.
Helped by utilization rate improvement and operating leverage effects, Samsung Biologics should see full-year 2020 sales of W991.7bn (+41.4% y-y) and OP of W265.4bn (+189.3% y-y; OPM of 26.8%). We draw attention to the planned: 1) US launch of SB3 (Herceptin biosimilar) in 1H20; and 2) the EU and US launches of SB8 (Avastin biosimilar) in 2H20. Samsung Biologics’ equity-method gains are primed to increase significantly in line with likely continued rapid earnings growth at subsidiary Samsung Bioepis.