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Samsung Electronics (005930 KS) Summary

Core Content Overview

Samsung Electronics (SEC) is a leading technology company in South Korea, with a significant market presence and diverse business segments. The company's share price is currently at KRW1,357,000, and the target price is KRW1,500,000, reflecting an expected increase of 11%. The market capitalization is USD188.8B, and the adjusted debt-to-equity ratio shows net cash position. The report suggests maintaining a HOLD rating and the target price, while recommending the preferred shares [005935KS] as a better investment option due to their higher value and upside potential.

Main Points

Earnings Outlook

• FY14 earnings are expected to remain muted, with a flat performance for most of the year and potential YoY growth only in 4Q14.
• Operating profit (OP) for 2Q14 is forecasted to be KRW8.32t, which is flat QoQ but down 5% YoY.
• The Street earnings revision cycle is hitting a trough, which could provide some support for the share price.
• SEC may initiate a share buyback program, which could act as a catalyst for the stock.

Smartphone Segment

• Smartphones remain the main driver of revenue and profit, contributing 60% of group revenue and 66% of profit in FY14F.
• Unit sales growth is expected to be mid-to-high teens, reaching 375-380m units, which should help maintain its global market share of 30%.
• Premium smartphone growth is slowing, with only 5-7% growth expected in 2014 due to market saturation, reduced subsidies, and slower innovation.
• Mainstream market and emerging markets (EM) are still growing, but competition is intensifying.

Capital Management

• SEC has a strong cash position, with USD55bn in FY14F and USD78bn in FY15F.
• The company is likely to increase its payout ratio, with a potential 30% payout ratio based on 1/3 of free cash flow (FCF).
• Capital management may include share repurchases and dividends, with a budget of USD8bn (USD2.8bn in dividends and USD5.2bn in share repurchases).
• The preferred shares are seen as a better value proposition, offering a 10% discount to common shares.

Semiconductor Division

• The semiconductor division is expected to show strong earnings growth due to higher top-line and margin expansion.
• Operating profit for FY14 is forecasted at KRW10t, up 40% YoY, and likely to reach KRW12-13t in FY15F.
• System LSI (SLI) faces challenges, including a lack of viable AP designs and lower utilization due to weak demand and customer migration.
• SLI's operating profit is expected to remain flat or decline, with margins likely to stay low due to depreciation and utilization issues.

Key Information

Financial Highlights

Share Price Performance

• 52-week high/low (KRW): 1,544,000 / 1,217,000
• Free float (%): 71.3
• Issued shares (m): 147
• Market Capitalization: KRW199.9T

Major Shareholders

• Samsung Electronics Co., Ltd.: 11%
• National Pension Service of Korea: 7%
• Samsung Life Insurance Co., Ltd.: 7%

Earnings Revisions

• Street's FY14 OP forecast was lowered by 14% to KRW37t since December 2013.
• FY15 OP forecast was trimmed from KRW44.5t to KRW38.5t during the same period.
• Our OP forecasts are 2% below the current consensus, suggesting a cautious outlook.

Capital Management Scenarios

Valuation Methodology

• SOTP-based target price for common shares: KRW1,500,000 (10-15% discount from SOTP valuation of KRW1,710,311)
• Target price for preferred shares: KRW1,350,000 (10% discount to common shares)
• Net cash per share: KRW364,848

Valuation Bands

• Forward P/E Band: 10.3x to 9.0x
• Forward P/BV Band: 8.1x to 5.0x

Conclusion

Samsung Electronics faces a mixed outlook in FY14, with the smartphone segment remaining a key driver but experiencing slower growth due to market saturation and reduced innovation. The semiconductor division is expected to show strong earnings growth, while the System LSI segment faces challenges. The company is likely to implement more aggressive capital management through share buybacks and dividends, which could support the share price. Despite the muted earnings forecast, the preferred shares are seen as a better value proposition, with a target price of KRW1,350,000. The overall valuation methodology suggests that the common shares are still attractive, but the preferred shares offer a better return potential.