Samsung Q3 15A – King of commodities

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Attention can now turn to doing what it is best at.

• Samsung finally reported some growth as the weak KRW and the easy compares to 2014 banished the negative headlines.
• Preliminary Q3 15A revenues / EBIT will be KRW51tn / KRW7.3tn compared to consensus at KRW50.6tn / KRW6.7tn and RFM at KRW48.4tn / KRW7.3tn.
• This represents 7.1% YoY revenue growth and 80% YoY operating profit growth but it is worth bearing in mind that Q3 14A was one of the worst in the company’s history.
• This has been well received and the shares have performed well over the last two sessions.
• I suspect that the weakness of the KRW and Samsung’s ability to rapidly slash costs have paid a large role in the better than expected results.
• The Galaxy s6 has not sold nearly as well as hoped which put the kibosh on any real hope or returning to mid-teens handset margins as promised by management earlier this year.
• This combined with the comparisons to 2014 now being much easier, expectations have been reset and there are very unlikely to be any more horrible red headlines.
• That means that the focus of all the divisions can return to what they are best at: the manufacturing and sale of commodity products at good margins.
• In handsets, I have long believed that in handsets “good margin” means 10-12% as long as it can continue to out-ship its rivals by more than 2 to 1.
• With expectations and comparisons now reset at a much lower level, the drag effect of handsets on Samsung Electronics has been removed which should allow Device Solutions (Semiconductors) to drive steady growth from here.
• This outlook is much more modest than in the smartphone heyday but importantly the valuation of Samsung remains pretty undemanding.
• RFM forecasts that net income will only grow by 10% between 2015E and 2017E but that is enough to underpin a valuation of the shares at around KRW1.5m.
• Even with the recent rally, this offers 18% upside which is a lot more than is offered by Google, Apple, Amazon or Twitter.
• Consequently, I think that Samsung continues to be worthy of consideration up there along with Microsoft.