Bio Arm Contributions to Rise in Earnest

The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com -- Ed.

 

We believe that the impact of Covid-19 on Samsung C&T will be relatively limited, noting that: 1) earnings remain stable at its construction division, thanks to captive clients; and 2) higher plant utilization rates at the bio domain should lead to greater earnings contributions from this year. Also positive, helped by friendly dividend policies at SEC, Samsung C&T has been enjoying solid dividend inflow, enabling it to strengthen its own shareholder return policy. The firm’s shares are currently trading at a 59% discount to NAV.

Boasts differentiated earnings and rising shareholders’ value

While earnings at Samsung C&T’s leisure, food service, fashion, and trading businesses are inevitably to be hit by Covid-19 effects, the construction division should display stable earnings thanks to captive clients. And, helped by rising utilization rates, the bio arm is to start making earnings contributions in earnest from this year. Given such, the overall impact of Covid-19 on earnings should be limited. Also, the firm should continue to enjoy strong dividend income in 2020 (W637.7bn, flat y-y). Helped by friendly dividend policy at Samsung Electronics (SEC; represents around two-thirds of Samsung C&T’s overall dividend income), the holding company has been enjoying solid earnings, enabling it to beef up its own shareholder return policy. Over 2020~2022, it plans to pay out 60~70% of what it receives from affiliates as dividend income.

1Q20 review: Construction division earnings stable; contributions from bio arm rising

Samsung C&T announced consolidated 1Q20 sales of W6,960.1bn (-5% y-y) and OP of W147.0bn (+40% y-y), with both figures surpassing our projections.

Weighed upon by Covid-19 effects, the leisure and fashion divisions booked operating losses of W39.0bn (RR y-y) and W31.0bn (TTL y-y), respectively, with both results slipping under our estimates. But, the food division registered OP of W19bn (-14% y-y), with the impact of Covid-19 on hotel and hospital-related earnings being partially offset by greater use of office cafeterias due to reduced external work activity. The trading division recorded higher-than-expected OP of W23bn (-28% y-y), as the effects of: 1) reduced trading volume; and 2) energy commodity price decline have yet to be fully reflected in earnings. Meanwhile, with overseas project delays having minimal impact on its sales, the construction division showed OP of W124bn (+19% y-y). Samsung C&T’s new orders totaled W2.6tn in 1Q20 (23% of 2020E order target of W11.1tn). Despite a recent plunge in the WTI price, the firm is expected to achieve its order target in 2020, as: 1) its non-captive clients are well-diversified in terms of both type and region; and 2) captive affiliate orders of around W4tn are to provide earnings ballast. Elsewhere, the bio division displayed OP of W51.2bn (TTP y-y), benefiting from OP leverage effects thanks to higher plant utilization rates.

Despite both Covid-19 effects and a likely decrease in sales at the construction division (due to the completion of high-tech projects), we expect Samsung C&T’s 2Q20 earnings to show q-q improvement, forecasting overall OP of W180.9bn (-18% y-y).

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