Rechargeable Battery Business Excessively Undervalued
The author is an analyst of NH Investment & Securities. He can be reached at minwoo.ju@nhqv.com. -- Ed.
We expect Samsung SDI to log solid 2Q22 earnings thanks to price hikes and increased production at customers. We raise our TP to reflect European plant expansion plans and productivity growth. Valuation attractiveness at the rechargeable battery division deserves investor attention.
Rechargeable battery business excessively undervalued
Adhering to a Buy rating, we raise our TP on Samsung SDI by 20% to W1,200,000. We hike our 2024 EBITDA estimates for small-sized batteries by 20% and mid/large-sized batteries by 29% to reflect expansion of Hungary plant #2 and line productivity growth (+10~20% on increased production speed (PPM)). The firm’s production capacity is forecast to expand from 85GWh in 2022 (cylindrical 30GWh + mid/large prismatic 55GWh) to 141GWh in 2024 (cylindrical 51GWh + mid/large prismatic 90GWh).
If removing non-operating value (W5.3tn), net borrowings (W3.2tn), and the value of the electronic materials business (W5.3tn) from the current market cap (W37.8tn), we arrive at a value for the rechargeable battery business of W30.2tn. Given our 2023 and 2024 EBITDA estimates for the rechargeable battery division of W4.1tn and W5.1tn, respectively, the division appears excessively undervalued at 2023F and 2024F EV/EBITDAs of 7.4x and 5.8x, respectively, compared to domestic peers’ 19x and 15x.
Expect solid 2Q22 performance
Samsung SDI is expected to log 2Q22 sales of W5.0tn (+49% y-y, +22% q-q) and OP of W413.2bn (+40% y-y, +28% q-q), with sales and OP to top consensus by 7% and 5%, respectively. Amid continuing shipment growth to non-IT clients, Rivian production has more than doubled in 2Q22 from 1Q22’s 2,553 units. We estimate the firm’s 2Q22 small-sized battery sales at W1.7tn (+59% y-y, +18% q-q), helped by a cylindrical battery price increase of about 10%. In addition, Gen 5 shipments to BMW are believed to be accelerating in earnest, which should result in mid/large-sized battery sales of W2.4tn (+52% y-y, +33% q-q).
In 2H22, mid/large-sized battery sales are to continue rising on the back of a gradual easing in impacts from production disruptions at automakers, the start of operations at Hungary plant #2, and the addition of Gen 5 supply to Audi. At the small-sized battery business, additional price hikes of over 10% for cylindrical batteries are anticipated in 3Q22, and solid earnings growth should sustain on greater production of Rivian/Volvo trucks. Although cost burden exists due to metal and energy price expansion, profitability can be defended by product mix improvement (Gen 4 and 5 supply portion to exceed 50% in 2022) and the passing of higher metal costs onto customers.