Samsung Q2 15A – Over the hump

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This will be the last quarter of hard comparisons.

• Samsung guided to weaker than expected Q2 15A results as the Galaxy s6 appears to have been unable to make much of a dent in the iPhone 6’s appeal.
• Q2 15A revenues and EBIT are expected to be KRW48tn / KRW6.9tn compared to consensus at KRW53.4tn / KRW7.2tn and RFM at KRW50.0tn / KRW6.5tn.
• A full breakdown of the results will be given around the 27^th
• Part of the weakness in revenue is due to the fact that supply of the Galaxy s6 versions was completely at odds with demand.
• The s6 edge is meaningfully more expensive than the s6 and given that previous edge devices have not sold well, Samsung was rational in its expectation that the regular s6 would outsell the edge 4 to 1.
• Unfortunately this was not the case as demand has been roughly 1 to 1 leaving a shortage of the s6 edge and inventories of the regular s6.
• This is a common occurrence in the handset market where demand is notoriously difficult to predict and hence this is no fault of Samsung’s management.
• The net result is that overall shipments of the s6 have not been as good as hoped causing the revenue miss reported.
• The good news is that margins have held up well and I am comfortable that the handset business has been able to maintain or even improve on its 10.6% result of Q1 15A.
• As long as market share and margins can be held stable, the way will be clear for Device Solutions (memory, panels and LSI) to generate profit growth for the group going forward.
• Furthermore, with Q2 15 out of the way, the comparisons become much easier as it was Q3 14A when the handset business collapsed.
• This means that Q2 15A should be the last quarter where the headlines are overwhelmingly negative.
• However, this does not mean that good times are here again as Device Solutions is not about to explode into rapid growth.
• Hence, RFM thinks that low single digit earnings growth is likely for at least the next couple of years.
• This is enough to drive a valuation of around KRW1.4m per share giving the shares a little upside from here.
• I remain unexcited about the prospects for Samsung and prefer Microsoft or Google.