To Strengthen New Business Portfolio
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, trading and fashion divisions are showing brisk earnings momentum. The firm is moving forward to strengthen its business portfolio. Benefits stemming from governance issues are also likely, including higher dividend payouts (following the initiation of an inheritance process) and a strengthening of the company’s status. Samsung C&T’s shares are currently trading at a 60% discount to NAV.
Looking forward to earnings momentum; to benefit from initiation of inheritance
We expect Samsung C&T’s annual OP to rise 62% y-y to W1.39tn in 2021, helped by an improved utilization rate at its bio division, favorable market conditions for its trading division, and a rapid earnings recovery at its fashion division. Even without considering the value of its in-house businesses, tangible & intangible assets, and treasury shares, the total value of Samsung C&T’s stakes in listed affiliates (including SEC (5.0%) and Samsung Biologics (43.4%)) alone are estimated to reach W56.3bn, a level more than twice its current market cap.
Following its Hanwha General Chemical stake disposal (from which proceeds of W821bn are to be received in installments for three years), the company is moving to strengthen its business portfolio by investing W150bn in venture funds (life science and construction technology). In addition, it is earmarking investment for next-generation nuclear power plant and hydrogen ventures. Also boding well are expectations that the chair of Samsung group will receive amnesty or parole in August.
Despite the start of an 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%. It is also expected that SEC and Samsung C&T would increase dividend payments to finance inheritance taxes. We also positively view business restructuring for the purposes of earnings growth and the strengthening of Samsung C&T’s status within the Samsung Group.
2Q21 review: Trading division going strong; fashion arm recovery sustaining; bio division earnings robust
Samsung C&T reported 2Q21 sales of W8.55tn (+18% y-y) and OP of W425.2bn (+79% y-y). OP beat consensus by a wide gap. The trading division registered an earnings surprise, the fashion business continued to show an earnings uptrend, and the bio division delivered healthy earnings. Earnings at the trading division (OP of W90bn, +582% y-y) reflected the effects of sustained strong steel and chemical trading activity. The fashion arm (OP of W43bn, 4,200% y-y) displayed further earnings improvement in response to both recovering consumer sentiment and increased online sales (which represent around 20% of the division’s total sales). But, earnings at Samsung C&T’s construction business (OP of W113bn, -24% y-y) fell in the wake of the completion of large-scale construction projects. However, the securing of W7.5tn worth of construction orders in 1H21 has helped the firm to achieve 70% of its annual order target guidance as of end-1H21.
Looking at 3Q21, we expect Samsung C&T’s overall OP to drop to W328.1bn (+52% y-y) on both off-seasonality for its fashion business and effects of tighter social distancing rules on its leisure and food/beverage domains.