The author is an analyst of KB Securities. He can be reached at email@example.com. — Ed.
Initiate coverage with BUY and target price of KRW260,000
We initiate our coverage of Samsung SDS with a BUY rating and DCF-based TP of KRW260,000 (2.76x 12m fwd P/B; 46.9% upside vs. last closing price). We forecast 10.5% 5y CAGR OP based on the following investment points: (1) Increases in capex at Samsung Electronics and other affiliates should fuel revenue growth for IT services; (2) Digitization should accelerate overall revenue growth; and (3) Abundant cash holdings present a range of options for enhancing shareholder value (e.g., M&A).
Revenue growth fueled by capex at affiliates
Samsung SDS’ affiliate manufacturers have increased capex by over 30% since 2H19 to accommodate 5G networks, system memory chips and OLED panels. They will continue to invest heavily in system integration projects and use cloud-computing services. System integration projects usually begin near the end of large-scale capex, which is where the affiliates are at the moment, hence Samsung SDS should enjoy revenue growth soon.
COVID-19-led digital transition to boost revenue from non-affiliates
Samsung SDS offers solutions and services essential for workplace digitalization (e.g., telecommuting and remote factory management), and COVID-19 has accelerated this transition. Earnings visibility is high, as Samsung SDS has been working with its affiliates over the past five years to test its four strategic businesses. Also, the Korean government’s recently announced Digital New Deal initiative, which includes support for the digital transition of SMEs, should create new opportunities for the company; revenue from non-affiliates is expected to grow 8.3% over the next three years.
Abundant cash holdings provide potential for M&A and better shareholder returns
Samsung SDS, which had KRW4.0tn in cash & cash equivalents as of 2Q20 (incl. short-term financial assets; net cash of KRW3.6tn), brings in over KRW700.0bn each year (2019 EBITDA at KRW1.3tn). Its large cash reserve provides potential for M&As, better shareholder returns and increasing shareholder value.