External Environment Worsening

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

 

Despite unfavorable business environment, shares still undervalued

Despite Samsung Life’s ongoing sluggish performance, we believe that the stock is undervalued and attractive in terms of absolute and relative value.

Lower TP to W69,000

Reflecting the low-interest environment and stock market volatility, we revise down our 1Q20 earnings estimates, and lower our TP from W90,000 to W69,000. Our new TP was derived by applying a target P/B of 0.37x to 2020 BPS of W189,589.

Expect 1Q20E NP of W282.9bn (-36.8% y-y)

We forecast 1Q20 NP of W282.9bn (-36.8% y-y), versus consensus of W371.7bn. The sluggish earnings are mainly attributable to the worsening external environment (widening stock market volatility and declining interest rates) due to Covid-19. In March, Samsung likely accumulated more than W200bn in guarantee reserves for variable insurance, while facing impairment losses on some of its equity assets. However, gains from the sale of real estate are expected to offset some of the loss factors. Depending on the level of stock market recovery in 2Q20, part of the guarantee reserves accumulated in 1Q20 are expected to be reversed in 2Q20.

Unfavorable environment vs absolutely undervalued price

It is a fact that the domestic life insurance industry continues to struggle. Interest rates, which are the most important macro variable in the life insurance industry, continue to weaken. In addition, economic downturns and increased stock market uncertainty are other burdensome factors.

However, we believe Samsung’s current share price is excessively undervalued compared to the deterioration of its fundamentals. Compared to end-February, when the Covid-19 crisis began in earnest, the company’s share price is down 16%, a larger drop than other listed companies (-10~+6%). Considering the firm’s high capital adequacy and various non-interest income sources, there is no reason why the stock should be weaker than other life insurers. For this reason, we believe that the company at least deserves to narrow the share price gap with its rivals.

 

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