ESG-focused Management
The author is an analyst of Shinhan Investment Corp. He can be reached at sh.kim@shinhan.com. -- Ed.
Governance structure stabilized with removal of long-term noise
There has long been noise around the transfer of control of Samsung Group from the late Chairman Lee Kun-hee to his son Lee Jae-yong, who is the largest shareholder of Samsung C&T. The noise is now dissipating despite remaining uncertainties over the inheritance of the late chairman’s stakes in Samsung affiliates. In all scenarios, Samsung C&T should rise in importance within the governance structure of Samsung Group.
We expect Samsung C&T to focus on increasing its enterprise value and dividend payments, which is needed by the largest shareholder to pay off his inheritance tax. As he stated in a public apology last year, Samsung C&T is forecast to improve its long-term enterprise value by exiting non-core and inefficient businesses.
ESG-focused management to lead shares to trade at a premium
Samsung C&T, for the first time among domestic manufacturers, has decided to withdraw from new investments and businesses related to coal. The company will phase out all coal-related businesses after completing the ongoing construction of two coal-fired thermal power plants in Gangneung, Korea and Vietnam. It instead plans to expand new flagship businesses like LNG combined cycle power plants and storage tanks.
Samsung C&T also plans to increase its presence and investments in the renewable energy sector (wind/solar power, etc.). The company is shifting its business focus toward ESG through aggressive investments in eco-friendly businesses as well as improvement of governance structure (source of long-term noise) and management transparency. This focus shift should be gradually reflected in the company’s enterprise value.
TP raised to KRW200,000 on rise in value of stakes in affiliates
Samsung C&T is expected to have posted consolidated operating profit of KRW245bn (-24.6% YoY) on sales of KRW7.97tr (+3.6% YoY) for 4Q20, slightly missing the market consensus. Despite solid results from construction, overall earnings were weighed down by: 1) trading suffering unfavorable base effect created by spot contracts for steel products (China/Vietnam); and 2) apparel negatively affected by COVID-19 despite high seasonality.
The recent share price rally for Samsung Electronics and Samsung Life Insurance drove up the value of Samsung C&T’s stakes in affiliates (Samsung Biologics, etc.) to KRW52.3tr. However, the holding company’s market cap stands at a mere KRW28.7tr. Reflecting increased value of affiliate stakes and upward-adjusted forecasts for construction earnings, we raise our target price for Samsung C&T from KRW153,000 to KRW200,000.