20171207-三星证券-Revises_outlook_and_announces_rights_offering_7页_287kb

Summary of Samsung Heavy Industries (010140) Update

Core Content

Samsung Heavy Industries (SHI) has revised its financial outlook for 2017 and 2018, announcing expected operating losses and a planned KRW1.5t rights offering in 1H18. The company's updated guidance reflects a more conservative approach to its cost of goods sold (COGS) ratio and acknowledges risks such as drilling rig-related losses and potential capital impairment. Despite these challenges, the company maintains a BUY rating, with a revised 12-month target price of KRW10,700, which offers a 19% upside from the current price of KRW8,960.

Key Changes

Financial Outlook

• 2017 Guidance: SHI expects a full-year operating loss of KRW490b, with a KRW560b loss in 4Q17. This loss is attributed to restructuring costs (KRW60b), reselling two drilling rigs (KRW90b loss), and COGS ratio adjustments (KRW430b).
• 2018 Guidance: SHI anticipates an operating loss of KRW240b, with a significant portion expected to come from SG&A cost hikes. However, ongoing change-order negotiations could potentially prevent this loss.
• Sales and Earnings Trends: Sales are expected to decline from KRW7,995b in 2017 to KRW5,133b in 2018, while adjusted EPS is projected to be negative in both years.

Rights Offering

• SHI plans to issue new shares worth KRW1.5t in 1H18. This is due to the company's high debt ratio of 116% and concerns from creditors about repayment after losses since 2015.
• The company currently has KRW451.3b in cash and KRW649b in financial instruments, with net debt down by KRW1t from earlier in the year.

Financial Ratios and Valuation

Conclusion and Implications

• The revised target price of KRW10,700 is based on projected per-share book value and historical valuation multiples, not ROE.
• The new target reflects an expected loss of KRW730b over 2017-2018, KRW220b in capital impairment risk related to drilling rigs, and the anticipation of new shares being issued at a discount.
• Despite the negative outlook, the target price still offers upside at current prices, as the share price has already factored in most known risks.

Summary Financial Data

Financial Implications

• SHI's financial status at the end of Q3 2017 shows a net debt of KRW2,593b, with a debt-to-equity ratio of 116%.
• The company's cash flow from operations is expected to be negative in 2017 but positive in 2018.
• The company's free cash flow is projected to be positive in 2018, indicating potential for recovery.

Analyst Notes

• The report reflects the company's new guidance for 2017-2018 and does not account for the rights offering.
• The analyst team does not own any shares or convertible debt instruments of SHI.
• The report is prepared without undue external influence and accurately reflects the analysts' views.

Rating Changes

Investment Ratings

• BUY: Expected to increase in value by 10% or more within 12 months and is highly attractive within the sector.
• HOLD: Expected to increase or decrease in value by less than 10% within 12 months.
• SELL: Expected to decrease in value by 10% or more within 12 months.

Disclaimer

• This report is for information purposes only and does not constitute investment advice.
• The information provided is not guaranteed to be accurate or complete.
• Samsung Securities disclaims all responsibility or liability for any loss or damage arising from the use of this report.