Brisk Earnings Growth Momentum Underway
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
In 2021, Samsung C&T’s bio division should display strong earnings momentum in line with an increased utilization rate. Governance-related benefits are also likely, including higher dividend payouts (following the initiation of inheritance process) and a strengthening of the company’s status within the Samsung Group. Samsung C&T’s shares are currently trading at a 60% discount to NAV.
Brisk earnings growth momentum underway; to benefit from initiation of inheritance processes
We expect Samsung C&T’s annual OP to rise 44% y-y to W1.238tn in 2021, helped by the securing of a stable client base at its construction division and an improved utilization rate at its bio division. Even without considering the value of Samsung C&T’s in-house businesses, tangible & intangible assets, and treasury shares, the total value of its stakes in listed affiliates (including SEC (5.0%) and Samsung Biologics (43.4%)) is estimated to reach W53.6tn, a level more than twice its current market cap. Moving ahead, we believe that uncertainties over the absence of the group’s leader (the major source of Samsung C&T’s undervaluation) will ease with the help of Korea’s largest-ever inheritance tax payment and societal return plans (including W1tn worth of donations to medical institutions and the donation of 23,000 artworks).
Despite the start of inheritance process, we believe that the combined stake of controlling shareholders in Samsung C&T (which stands at the top of the Samsung Group’s governance structure) will remain unaltered at 31.6%. We also expect SEC and Samsung C&T to beef up their dividend payouts to finance the inheritance taxes. Also boding well is ongoing business restructuring for the purposes of growth and the strengthening of the company’s status within the Samsung Group. We see 2021E annual DPS of W4,500 (+96% y-y; DY of 3.4%), taking into account both special dividend revenue (W471.5bn) from SEC and Samsung C&T’s dividend policy (redistribute 60~70% of dividend income coming from affiliates over 2020~2022).
1Q21 review: Trading division and fashion earnings arrive strong, far topping consensus
Samsung C&T reported consolidated 1Q21 sales of W7.8396tn (+13% y-y) and OP of W302.6bn (+106% y-y), with OP beating the market projection by a wide margin.
We mainly attribute this robust performance to an earnings surprise for the firm’s trading division and an earnings recovery at its fashion domain. The trading division (OP of W84bn, +265% y-y) reflected the effects of preemptive restructuring and brisk steel and chemical trading. Overcoming off-seasonality, the fashion division (OP W21bn, TTP y-y) delivered healthy earnings on a consumer sentiment recovery, online sales expansion, and restructuring benefits. And, the construction division (W135bn, +9% y-y) delivered solid earnings on normalized overseas project operations amid reduced impact from Covid-19. Particularly warranting attention is the division’s securing of W6.4tn worth of construction orders in 1Q21, achieving 59% of its annual order target guidance.