Samsung Q1 16A – Forgotten jewel

Reply to this post

Semiconductors remain the real engine of growth.

• Samsung reported good results and I think that it is both handsets and semiconductors that have bolstered profitability.
• Q1 16A revenues / EBIT were approximately KRW 49tn / KRW 6.6tn nicely ahead of consensus at KRW 48.8tn / KRW 5.5tn and RFM at KRW 48.8tn / KRW 5.5tn.
• The initial figures for the Galaxy s7 look to have been much stronger than the Galaxy s6 mainly as a result of its lower price.
• The s7 was also available a month earlier than the s6 giving it more time to have a positive impact on the Q1 16A figures.
• Although all of the attention is being placed on the handset business, I suspect that Device Solutions also contributed to the better than expected figures.
• Samsung has reported revenues very close to RFM forecasts so the improvement in profit has all been about an improvement in margin.
• If I allocate all of the “extra” KRW 1.1tn of operating profit to the handset business then margins were probably around 14% rather than the 9-10% where they have been for the last 5 quarters.
• I think it unlikely that a single model being available for only part of the quarter could have been responsible for such a large swing in profitability.
• Consequently, I suspect that the semiconductor business has also had an impact on these figures.
• Q4 15A was a difficult quarter for the semiconductor business as an unusually weak forecastforf Q1 16A demand caused margins to dip to 21% from the 28-30% it had been enjoying during 2015.
• The resulting inventory correction in adjusting to a weakening market in 2016 caused margin pressure.
• Now that this correction appears to have been completed, it looks like the margins at Semiconductors as been able to bounce back nicely.
• Consequently I think that margins in handsets have come back to around 11% compared to 8.9% in Q4 15A and semiconductors have bounced back to around 27% from 21.2% in Q4 15A.
• This is good news because in the medium term, the growth story in Samsung Electronics is all about the semiconductor business steadily expanding its revenues at its historically, excellent margins.
• This thesis also requires for the handset business to keep its margins flat at around 9-11%.
• In this regard, Q1 16A looks to have been a good quarter and allays my fears from Q4 15A that the semiconductor business was slipping.
• Samsung’s shares have already rallied on the back of good Q1 16A results but I think that the shares remain good value to KRW1.56m (22% from here).
• Samsung along with Microsoft remain my top choices although I can see short-term upside in Google as well very low risk of downside in Apple.