Semiconductor Earnings Forecast to Surge
The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. -- Ed.
Raise TP to KRW88,000; Server replacement cycle resumes after four years
We maintain BUY on Samsung Electronics (SEC) as we lift our TP 10% to KRW88,000 (target P/B 2.0x 12-month forward BVPS). We updated our TP to reflect changes to ROE (9.6% → 10.0%) and COE (6.48% → 6.46%) after revising up our 2021-2023 earnings forecast. In particular, we highlight the following:
(1) Semiconductor earnings are forecast to surge (2020E OP KRW19.3tn → 2021E OP KRW25.9tn, +34% YoY) as the server replacement cycle resumes for the first time in four years and as inventory demand ramps up at Chinese mobile device producers (Oppo, Vivo, Xiaomi (OVX)) due to US restrictions on Huawei;
(2) Non-memory revenue is projected to grow to a historic high next year – surpassing the KRW20tn mark – fueled by rapid foundry expansion;
and (3) DP earnings should improve led by restructuring at the flexible OLED unit following SEC’s exit from the LCD market.
Accordingly, we forecast earnings growth will gain traction from next year (2021E OP KRW45.9tn, +27% YoY).
4Q20E OP of KRW9.2tn (-26% QoQ); DP earnings to improve sharply
We forecast 4Q20 revenue at KRW62.7tn (-6% QoQ, +5% YoY) and OP at KRW9.2tn (-26% QoQ, +28% YoY) as earnings should deteriorate across all divisions, excluding DP. However, DP results should improve sharply as utilization improves to over 97% for flexible and rigid OLED panels, fueled by: (1) robust iPhone 12 demand; and 2) larger orders from Chinese mobile device manufacturers. Specifically, we forecast DP OP at KRW1.6tn (+244% QoQ). Overall, we forecast semiconductor OP at KRW4.4tn, IM at KRW2.3tn, DP at KRW1.6tn and CE at KRW0.9tn.
New policies expected in January focused on larger dividends
We anticipate management will announce additional shareholder-return policies in January. And, the focus should be on increasing dividend payouts, as: (1) SEC appears positioned to increase utilizing FCF to reinforce shareholder-return policies after the 2018-2020 policy that was announced on Oct 31, 2017 (pay out 50% of FCF (KRW29tn) as cash dividends and allocate any remaining resources as additional cash dividends or share buybacks/cancellations) winds down; and (2) Controlling family members should benefit from higher cash dividends in terms of financing inheritance tax burdens. As such, the company’s dividend appeal should grow increasingly towards end-December.