Samsung – Limited fallout.

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A fast and efficient recall results in no lasting harm. 

  • Samsung has taken the prudent decision to recall the Galaxy Note 7 following a series of fires almost certainly caused by manufacturing faults with the battery.
  • RFM research indicates that this will affect approximately 2.5m devices which I estimate cost Samsung approximately $1bn to produce.
  • I suspect that the cost of this will almost certainly be borne by the suppliers of the batteries for this product which are Samsung SDI (Samsung owns 20%) and Chinese supplier Amperex.
  • Assuming that Samsung SDI supplied 70% of the batteries, then the total financial hit to Samsung is likely to be around $140m that will be felt through lower profit in the associates line of the profit and loss account.
  • This will leave barely ripple in the accounts but the reputational damage to Samsung’s brand could be meaningful.
  • Samsung is the pre-eminent Android vendor with by far the strongest brand and a reputation for producing high quality devices.
  • Furthermore, the timing could not be worse with Apple due to launch a range of new products including the iPhone 7 in two days’ time.
  • This is why the speed with which Samsung puts this issue to bed is of paramount importance.
  • Samsung has already taken the decision to offer consumers to replace their devices with a Galaxy s7 or s7 edge which will speed replacement as these devices are already in stock.
  • Where there is a difference in price, I suspect that Samsung will be more than generous to its users.
  • Samsung has acted quickly and decisively to deal with its problems in the past and I see this situation as no different.
  • Consequently, I think the next few weeks will be difficult with bad press and new Apple products, but as long as Samsung executes the recall quickly and diligently, I see no lasting harm.
  • I am confident that it will do exactly that.
  • Hence, I remain unconcerned with neither Samsung’s market share in Android nor its profitability in the short term as it remains in the middle of a healthy replacement cycle (see here).
  • I see no material change to Samsung estimates in the short-term which leads me to remain positive on Samsung up to a share price of KRW1.8m, some 13% above where it is now.
  • Samsung remains alongside Microsoft and Baidu my top choices for the balance of this year.

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.