Covid-19 Likely to Accelerate Move Towards Digital Transformation

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

 

While executions of new projects have been delayed amid the Covid-19 outbreak, we point out that two-thirds of sales at Samsung SDS’s IT services division are generated from recurring outsourcing services. In addition, expectations towards mid/long term earnings growth at the IT services arm’s strategic businesses remain valid in line with the acceleration of digital transformation at clients.

Expectations towards mid/long-term digital transformation growth remain valid

Having climbed over 2015~2019, Samsung SDS’s annual OP figures are to slow markedly this year, weighed upon by: 1) delay in execution of new projects (other than recurring outsourcing services); and 2) a slowing in securing non-captive clients in line with worsened sentiment towards IT investment amid the spreading of Covid-19. That said, there is no doubt towards the commitment of Samsung SDS’s major clients to digital transformation. Led by a widened portion of non-captive clients, the logistics BPO division should continue to display relatively solid earnings growth going forward. And, possessing W4.0tn worth of net cash, Samsung SDS is not facing any financial risks.

Moving ahead, we expect to see a Covid-19 crisis-spurred acceleration in the move towards digital transformation, including higher demand for both cloud services and non-face-to-face working environments. Accordingly, we view anticipation towards mid/long-term earnings growth at the IT services arm’s four strategic businesses (intelligent factory, cloud services, analytics, and solutions) as remaining valid. Likely to be part of this growth are opportunities being presented under the comprehensive Korean New Deal plans, including the strengthening of Data Network AI (DNA) ecosystems and K-cyber security.

2Q20 review: Logistics BPO division displays relatively solid earnings growth

Samsung SDS booked 2Q20 sales of almost W2.6tn (-8% y-y) and OP of W196.7bn (-24% y-y), with sales missing our forecast but topping consensus. Overall OP came in above both our estimate and consensus.

Sales at the IT services division fell to around W1.3tn (-16% y-y)—as in 1Q20, earnings were dampened by delays in sales generated at some projects. In line, the division’s OP fell to W184.2bn (-25% y-y; OPM of 14.0%, -1.4%p y-y). Meanwhile, sales at the logistics BPO division picked up (y-y) in response to 1) greater sales of logistics services (air transportation); and 2) a widened non-captive sales portion (18%). But, OP at the logistics BPO division slid to W12.5bn (-5% y-y) due to cost increases stemming from higher air-freight fees.

Having been tepid since 4Q19, quarterly sales at the logistics BPO division are set to resume growth from 3Q20 on: 1) likely higher order volume at the logistics BPO division (despite off-seasonality); and 2) rebounding IT investment at its clients. However, 3Q20 OPM will likely be limited to around 6% (OP of W183.5bn, -11% y-y) by investment expenses related to affiliates’ overseas online businesses.

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