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Morningstar | Samsung’s Solid Preliminary Numbers Driven by the Memory Business Will Give Relief to the Market

Samsung Electronics has announced solid preliminary results for the September quarter. Revenue was KRW 65 trillion, which is in line with our forecast of KRW 66 trillion and up 5% from the previous year, and operating income was KRW 17.5 trillion, which is also in line with our expectation of KRW 17.4 billion, reaching historical high operating margin of 27%. While the breakdown will be disclosed later this month, we assume that the strong numbers are driven by its semiconductor business; solid pricing of DRAM and increasing shipment of NAND for the peak season. As numbers were fairly in line with our view, we will retain our fair value estimate of KRW 56,000 per share, which is approximately 25% above yesterday’s closing price.

While we believe that solid numbers will somewhat give relief to the market, we do not expect a robust recovery of the share price in the short run, as we view that the market is concerned about the ongoing price decline of NAND flash memory and the potential price decline of DRAM in 2019. Therefore, Samsung’s future memory outlook, which will be unveiled at the conference call later this month, will be important to forecast the future demand-supply balance of memories.

Despite the future uncertainty of the memory business, we believe that the downside of the share price is limited for three major reasons: 1) Samsung can maintain high margin of DRAM, by controlling its production capacity and by leveraging its advantage on producing micronized circuits; 2) Samsung’s share has dropped more than 20% from its peak in last November, which suggests that the concern to the memory business is mostly priced in; and 3) Samsung’s dividend yield of 3%, which is underpinned by its shareholder return policy, will look attractive for investors and thus support the share price.