Discount to Narrow
The author is an analyst of Shinhan Investment Corp. He can be reached at sh.kim@shinhan.com. -- Ed.
Lee Jae-yong’s release on parole to ease concerns over control and lead to benefits for minority shareholders
Samsung’s vice chairman Lee Jae-yong will be released on parole, the Ministry of Justice announced on Aug. 9. Lee's release will help to remove uncertainties over the absence of a control tower of the Samsung Group and the delays in finalizing decisions on M&A deals and large-scale capex spend. Going forward, efforts to strengthen Samsung C&T's standing in the group’s governance structure and to secure funds for payment of inheritance taxes should drive all affiliates to focus on increasing shareholder returns.
Samsung C&T pays out 60-70% of all the dividends it receives from affiliates, such as Samsung Electronics and Samsung Life Insurance, to shareholders. Thus, growth in the company's dividend income will benefit its largest and minority shareholders alike going forward.
Investor sentiment to improve for all Samsung affiliates
Investment for the semiconductor business, which requires fast decisions on a large scale, is now expected to gather pace. Gradual discussion is also likely to start for the additional reshuffle of ownership in Samsung SDS and financial affiliates. In the long run, investor sentiment should strengthen for affiliates that may be sold off following improvement in enterprise value.
Valuation discount to narrow on compelling equity stories
For 2Q21, Samsung C&T reported sales of KRW8.5tr (+18.3% YoY) and operating profit of KRW425bn (+78.6% YoY, operating margin of 5.0%). All-time-high earnings backed by both quantitative and qualitative growth were driven by the strong performance of Samsung Biologics and profitability improvement of trading and apparel divisions. We hold an upbeat outlook on construction for 2H21, with sales to flow in from high-tech projects.
Samsung C&T recently announced plans to invest into the development of new businesses. The company will consider equity investments in bio (life science), digital, and eco-friendly companies with its surplus cash, and plans to use a portion of the returns for further investment. In particular, we focus on the joint investment fund created for new technology development. These efforts should help to remove the discount applied to Samsung C&T shares in reflection of the company's lack of new growth engines. Compelling equity stories, building further on the retirement of treasury shares, sale of non-core businesses and improvement in fundamentals from restructuring efforts, will likely reduce the discount placed on shares going forward.
