Samsung Q3 15A – Coming of age.

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Samsung is starting to look more like a mature, grown up company.

  • Samsung reported reasonable Q3 15A results as the semiconductor powerhouse more than made up for the weaknesses elsewhere.
  • Q3 15A revenues and EBIT were KRW51.68tn / KRW 7.79tn in line with guidance given earlier in the month of October 2015.
  • Samsung shipped 108m units of which 86.4m were smartphones giving it market share of 23% which is a significant improvement on Q2 15A where market share was just 20%.
  • However, this came at the expense of price as Q3 15A mobile revenues increased by just 2% QoQ compared to smartphones units which grew by 16% QoQ.
  • Lower prices also took a toll on margins which fell to 9.0% from 10.6% in Q2 15A but critically, profitability has remained within the range I am expecting in the long-term.
  • This allowed another mighty performance from the semiconductor business (Device Solutions) to underpin Samsung’s financials.
  • In a market where most of its competition is struggling to stay afloat, Samsung grew revenues by 14% QoQ and 29% YoY delivering margins of 22.8%.
  • Samsung is increasing its investments in semiconductors and is showing every sign of being able to stay ahead of its competition.
  • It is this thought process of commodity products in massive volumes that is now being applied to the handset business.
  • It is this that leads me to believe that Samsung can deliver margins of 10-12% in Android handsets despite its competitors only managing 2-4%.
  • The caveat here is that Samsung must continue to out ship its next largest competitor by more than 2 to 1.
  • In Q3 15A Samsung shipped 3.2x more devices than its closest rival, Huawei, meaning that this risk looks very low for now.
  • Samsung’s outlook for Q4 15E is modest and the target is to continue growing semiconductors while keeping profitability in handsets steady.
  • However at the same time Samsung has announced a plan to return a significant amount of cash to shareholders.
    • First. $10bn worth of shares will be re-purchased and cancelled.
    • Second. Over the next three years 30%-50% of free cash flow will be returned to shareholders mostly via dividends but also through share buy backs where the shares will also be cancelled.
  • I see this as a good move as it indicates that Samsung is finally moving to treat shareholders fairly and raises my hopes that further improvements in corporate governance are in the pipe.
  • I view this program as better than many programs initiated by US companies which often fail to cancel the shares they buy back and instead use them for employee stock programs.
  • I have believed for many years that cash returned to shareholders via a buy-back program is not properly returned until the shares are fully cancelled.
  • The outlook for Samsung is one of slow but steady profit growth driven by Device Solutions and on that basis I still think the worst is over.
  • The shares are up 15% so far this month which brings Samsung closer to what I consider fair value.
  • However, this fair value also includes a 20% discount on the basis of Samsung’s shortcomings in corporate governance and shareholder interests.
  • If Samsung is really making improvements in these areas then there is scope for further upside.
  • If I owned Samsung I would not be selling it yet.

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.