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.