Earnings Growth Solid and Dividend Income Strong
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
We expect Covid-19 to have a relatively limited impact on Samsung C&T, noting that: 1) the construction division’s earnings remain stable thanks to its captive clients; and 2) higher plant utilization rates at the bio domain should lead to greater earnings contributions. Also positive, helped by robust dividend policies at SEC, Samsung C&T has been enjoying solid earnings, and has thus been able to strengthen its shareholder return policies. Its shares are currently trading at 61% discount to NAV.
Strengthening shareholder value based on solid earnings growth and strong dividend income
The impact of Covid-19 on Samsung C&T’s earnings should be limited, as the construction division (represents more than half of OP) is likely to: 1) sustain stable earnings backed by orders from captive clients; and 2) enjoy a strengthening in its housing business on reconstruction-related orders. Also, the bio arm is anticipated to make earnings contributions in earnest, helped by rising utilization rates. Spurred by robust dividend policies at Samsung Electronics (SEC), which accounts for around two thirds of Samsung C&T’s dividend income, the holding company has been enjoying solid earnings, and has thus been able to strengthen its own shareholder return policies. Of note, over 2020~2022, Samsung C&T plans to pay out 60~70% of the dividend income it receives from affiliates as dividends.
Reflecting both: 1) changes in share prices for listed subsidiaries; and 2) a discount rate of 40% (increased from the previous 35%), we raise our TP from W136,000 to W158,000 and offer a Buy rating. We note that the combined value of stakes in listed subsidiaries (including a 4.6% stake in SEC and a 43.4% stake in Samsung Biologics) alone amount to W41.7tn, a level that is twice as high as its own market cap. We also positively view the Samsung Group’s efforts to minimize governance related risks, as evidenced by the establishment of a compliance committee and the vice chairman’s apology over controversies surrounding his succession (which included a pledge not to pass on the group’s management to his children).
2Q20 preview: Bio arm likely posted healthy earnings
We expect Samsung C&T to report 2Q20 sales of W6,823.8bn (-14% y-y) and OP of W187bn (15% y-y), missing consensus. Weighed upon by Covid-19, the leisure and fashion divisions likely booked operating losses of W15.7bn (TTL y-y) and W7.1bn (TTL y-y), respectively. But, OP at the bio arm likely rose to W53.4bn (TTP y-y), helped by increased orders and higher utilization rates. Meanwhile, we believe that OP at the construction division was temporarily dented by the completion of high-tech projects. In 3Q20, Samsung C&T’s OP is expected to jump to W240.1bn (+11% y-y), backed by healthy performances at the construction and bio arms.