Samsung Q1 17 – Roaring 40s

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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 me, this is far more important to shareholder value than re-organising into a holding company.
• I view holding companies as conglomerates where good intentions are, more often than not, ground down into inefficiency, bureaucracy and slowness.
• Consequently, I 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 I reverse out the KRW1.0bn hit that was taken during Q1 17 in the handset business for the Note 7 disaster, I 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, I 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 (see here) and pre-orders are pointing to no lasting damage having been done.
• Admittedly, I 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 me to continue preferring Microsoft, Tencent and Baidu.