Ample Cash Holdings
The author is an analyst of KB Securities. He can be reached at joonsop.analyst@kbfg.com. -- Ed.
Maintain BUY and TP of KRW260,000
We maintain BUY and our target price of KRW260,000 for Samsung SDS. Key investment points include the following:
(1) Revenue for both IT Services and Logistics BPO have been on the rise, given increased capex and better business performance overseas by its affiliates (i.e., Samsung Electronics).
(2) Revenue from customers other than Group affiliates has been increasing as well, thanks to the surge in demand for digital transformation in the pandemic era.
(3) Ample cash holdings indicate more room for shareholder value enhancement (i.e., M&A, policy for greater shareholder returns).
1Q21E OP of KRW206.4bn to beat market consensus
We expect 1Q21E revenue and OP at KRW2.8tn and KRW206.4bn—above the market consensus of KRW2.71tn and KRW190.4bn (3m, FnGuide), respectively. We have revised up our estimates from our previous figures (revenue of KRW2.72tn and OP of KRW172.2bn) as we anticipate robust earnings for the company’s IT services business—i.e., a recovery in demand from the effects of the pandemic.
Recovery in operating conditions to support better performance by IT Services
Demand for IT services had contracted in 2020 as the pandemic forced companies to curtail investments. More recently, however, IT investments have been on the rise amid expectations that the pandemic situation will not be seeing an end in the near future, as well as the increase in need for digital transformation (Aju News, Apr 9). Meanwhile, Samsung Electronics has launched a next-generation ERP (N-ERP) system—which will be implemented and used by all of its branches worldwide by January 2022. (Maeil Business Newspaper, Apr 5).
Potential for enhancement of shareholder value given ample cash holdings
We believe this should provide a tailwind for IT Services. We believe that the company’s ample cash holdings (net cash balance of KRW3.8tn, cash and short-term financial assets of KRW4.0tn as of end-2020) indicate the potential for M&A (i.e., strengthened competitiveness) and for greater shareholder returns. 2020 DPS for Samsung SDS was at KRW2,400 (i.e., payout ratio of 41.9%). While there is uncertainty that members of Samsung’s owner family may sell their stakes in Samsung SDS to pay inheritance taxes, we believe that the company would likely implement policy for greater shareholder returns (i.e., increased dividends).