Samsung Q1 17 - Roaring 40s
Semis is a powerhouse with growth and margins in the 40s.
Samsung reported a superb set of results driven largely by semiconductors but announced that it would not be re-organising into a holding company much to the dismay of some activists.
Q1 17 revenues / EBIT were KRW50.6tn / KRW9.9tn compared to consensus forecasts at KRW49.5tn / KRW9.18tn. At the same time Samsung announced its first ever dividend of KRW28,000 (annualised) giving a yield of around 1.4%. It also announced that it would keep its promise to cancel all of the treasury shares that it has bought resulting in a further return to shareholders of KRW40tn.
This is a promise that many US and European companies implicitly make when they ask s for permission to buy back shares but in practice, rarely keep. For us, this is far more important to shareholder value than re-organising into a holding company.
We view holding companies as conglomerates where good intentions are, more often than not, ground down into inefficiency, bureaucracy and slowness. Consequently, we do not see Samsung’s reticence to become a holding company as a bad thing for shareholders.
Semiconductors was the powerhouse of these results posting 40% YoY growth with EBIT margins of 40% making up 63% of total profits. The handset business was much less exciting with a 17% YoY decline in revenues and EBIT margins of 9.2%. Even if we reverse out the KRW1.0bn hit that was taken during Q1 17 in the handset business for the Note 7 disaster, we still have only 14% EBIT margins.
While Samsung’s margins in Android are exemplary compared to its Android competitors, its semiconductor margins are industry leading, handsomely beating even Intel at the operating level. Consequently, we think that it is this business that will be the main driver of performance for the balance of 2017.
In that regard, the outlook remains good with steady demand coming from servers and handsets and no imminent threat to its domination of the memory industry. The implosion of Toshiba and potential change in ownership can only continue to benefit Samsung Semi in 2017. This could be further enhanced should Apple decide to move to OLED in its next iPhone generation for which Samsung is the most likely supplier. This should help provide some stability to the display business which is notorious for its wild swings between profit and loss.
The net result is that the outlook for Samsung this year remains very healthy with only one uncertainty on the horizon. This is the unquantified damage that has been done to the brand following the Note 7 disaster raising questions with regard to shipments of the Galaxy s8.
Despite this, the initial signs are good as the reviews of the device are overwhelmingly positive despite the software shortcomings and pre-orders are pointing to no lasting damage having been done. Admittedly, we put the brakes on this one too early by deciding to call time in Q4 16 when the scale of the Note 7 disaster became apparent.
Now with the share price above KRW2m, the opportunity for further upside is less obvious leaving us to continue preferring Microsoft, Tencent and Baidu
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