1) Investment highlights
- We continue to present Samsung Electronics at BUY and maintain our six-month-forward target price of KRW2,880,000 (the average of 11x 2017F EPS and 1.6x 2017F BPS). Samsung released preliminary consolidated revenue of KRW60tn and operating profit of KRW14tn for 2Q. Revenue was in line with our forecast but operating profit beat our forecast and the consensus estimate of KRW13.2tn by 6.1%. By division, we estimate semiconductors posted KRW7.8tn in operating profit on memory price hikes, display KRW1.6tn on rising flexible OLED shipments, IM KRW3.7tn on Galaxy S8 momentum, and CE KRW0.9tn on strong seasonality for consumer electronics and the recognition of earnings from Harman. Samsung is forecast to have shipped 79.4mn units of smartphones in 2Q, including 18mn units of Galaxy S8.
2) Major issues and earnings outlook
- We expect the PC DRAM contract price to rise 3% MoM in July. Mobile and server DRAM prices are also slated to increase further in July considering Inotera’s loss of around 70,000 wafers. The Inotera fab that suffered a production capacity loss is mainly used to produce 20nm-based mobile and server DRAM. This benefits Samsung since the tech giant is also a heavy producer of these chips. In 3Q, we believe the IM division’s earnings will hold up QoQ helped by the launch of the Galaxy Note 8 and strong performance by the Galaxy S8. We expect 3Q consolidated revenue to grow 14% QoQ to KRW68.8bn and operating profit 8.9% QoQ to KRW15.2tn.
3) Share price outlook and valuation
- Samsung’s strong earnings momentum this year, while steering the stock in a positive direction, has been widely anticipated. Additional stock catalysts are needed for the stock to re-rate further. For that matter, we note that Samsung has announced plans to return 50% of its free cash flow to shareholders in 2017. If the direction of this policy proves positive in 2018, it may create another stock re-rating story. Samsung’s recently announced capex plan is through 2021 and is in line with our forecast. That it has little capacity to attempt a mega-scale M&A at present also supports the view that its shareholder return programs will further strengthen.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.