[Into the Stock] Is Samsung C&T's 200,000 Won Price 'Pie in the Sky'? "Fundamentals Are Really Good, Though"

[Asia Economy Reporter Lee Seon-ae] On January 4, the first stock trading day of the year, Samsung C&T's closing price was 144,000 KRW. The closing price on the 15th of the previous month was 136,500 KRW. During a period when the KOSPI is hovering around 3200, this stock has been thoroughly neglected. Investors who have invested in Samsung C&T cannot help but feel anxious. Since the beginning of this year, the cumulative net purchases of Samsung C&T are 2,593 shares by individuals, 825 shares by foreigners, and -3,428 shares by institutions.

The securities industry has issued positive analyses regarding Samsung C&T's fundamentals. However, the stock price has been on a downward curve, with a large gap between the target price and the current price. Although there are many forecasts that this year's performance will exceed consensus, uncertainty due to signs of a COVID-19 resurgence is still considered a risk factor.

◆ KOSPI Underperformance Stock Price... Buying Opportunity Before Inheritance Event

Samsung C&T's stock price has fallen 5.2% this year, significantly underperforming the KOSPI's 8.48% rise during the same period. The overall poor performance of holding companies with conglomerate characteristics in a market led by individual stocks and themes had a major impact. However, uncertainties due to the group chairman's detention and the sideways movement of Samsung Electronics' stock price are also believed to have negatively affected the stock price.

With the stock price stagnant, the issuance of securities firm reports has also been limited. Only 21 reports have been issued from the beginning of the year to the 15th. Reports were issued until the end of January, but none were released in February and March. Starting in April, reports began to appear again ahead of the first-quarter earnings announcement and inheritance event.

According to Article 67 of the Inheritance Tax and Gift Tax Act, heirs obligated to pay inheritance tax must report the taxable value and tax base within six months from the end of the month in which the inheritance commencement date (date of death) falls. The late Chairman Lee Kun-hee passed away on October 25, 2020, and the 30th of this month marks the point when the outline of the inheritance will be revealed. Because of this, the securities industry has analyzed that there is a buying opportunity before the inheritance event and news flow occur in April and May.

Kim Su-hyun, a researcher at Shinhan Financial Investment, said, "Under various scenarios, it is highly likely that the current governance structure led by Samsung C&T will be maintained, and in past similar event periods, the company's stock price performance was all favorable," adding, "Since Samsung C&T's stock price has recently underperformed significantly compared to large construction stocks, it is worth buying and monitoring until the end of May."

The estimated inheritance tax on the shares held by the late Chairman Lee Kun-hee is about 11 to 12 trillion KRW. Even using the installment payment system, the amount is astronomical. Various scenarios exist regarding the inheritance of the key Samsung Electronics shares in this process. Chairman Lee Jae-yong may inherit ① only part of the Samsung Electronics shares (with Samsung C&T purchasing some), or ② all Samsung Electronics shares (raising funds through the sale of Samsung SDS shares). The sale of financial companies may also be considered. Researcher Kim emphasized, "Under any scenario, the current governance structure centered on Samsung C&T, where Vice Chairman Lee Jae-yong holds the largest shareholder status, will be maintained," and added, "Samsung C&T's importance is not only related to exercising management rights over electronics and life insurance but also connected to securing funds for inheritance tax and is expected to see dividend increases and corporate value enhancement in the future."

◆ Excellent Fundamentals

Although the stock price is stagnant, Samsung C&T's fundamentals as viewed by the market are excellent. This means there is ample room for growth.

In the first quarter of this year, Samsung C&T achieved new orders worth 5.2 trillion KRW from disclosed projects alone, including 1.9 trillion KRW for the Qatar LNG Tank construction, 2.1 trillion KRW for Samsung Electronics' Pyeongtaek Phase 3 construction, and 1.2 trillion KRW for the Taiwan Taoyuan International Airport Terminal 3 civil engineering and architecture project. Considering the annual new order guidance of 10.7 trillion KRW, the company has already achieved 48.6% of its annual plan early, increasing the likelihood of exceeding this year's order target. Last year's first-quarter new orders were 2.6 trillion KRW.

KB Securities analyzed that Samsung C&T's 2021 first-quarter (K-IFRS consolidated) sales will be 7.5912 trillion KRW (+9.1% YoY), and operating profit will be 268.1 billion KRW (+82.3% YoY, operating margin 3.5%), exceeding consensus for both sales and operating profit. The construction division is expected to maintain solid performance based on a stable order backlog, while the trading division is anticipated to see significant profit improvement due to rising raw material prices and demand recovery. The fashion and resort divisions are also expected to show improved results compared to last year.

Samsung Electronics decided on an additional special dividend of 10.7 trillion KRW on top of the usual annual dividend of 9.6 trillion KRW last year. Accordingly, Samsung C&T is estimated to have received 894.7 billion KRW in dividends from Samsung Electronics, and including Samsung Life Insurance and Samsung SDS, the total dividends received this year are expected to exceed 1 trillion KRW. Considering the policy to redistribute 60-70% of received dividends, Samsung C&T's dividend per share this year is expected to be 3,500 KRW, with a dividend yield of 2.7%. KB Securities researchers Jeong Dong-ik and Ahn Yoo-dong explained, "It is time to invest based on the company's fundamentals such as orders, performance, and dividends, rather than discussions about governance or inheritance tax."

◆ Gap Between Target Price and Current Price & Uncertainty Due to COVID-19 Impact

Shinhan Financial Investment and Kyobo Securities have set Samsung C&T's target price at 200,000 KRW. DB Financial Investment set it at 180,000 KRW, and KB Securities at 165,000 KRW. Compared to the current price, the gap is large.

However, from an investor's perspective, it feels like a "pie in the sky." Nonetheless, securities analysts continuously emphasize that the current price is sufficiently attractive for buying.

Baek Kwang-je, a researcher at Kyobo Securities, said, "There are no significant negative factors affecting intrinsic value, and rather, thanks to improved consolidated performance, record-high results are expected this year," emphasizing, "The current target price is conservative, applying a 50% discount to equity value, so we maintain the target price of 200,000 KRW."

He added, "First-quarter results are expected to show large improvements compared to the previous year, driven by performance improvements in construction and trading divisions as well as the remarkable growth of biologics. Additionally, more than half of the annual order target has been achieved, and relatively sluggish new orders are also progressing well," and recommended buying at a very attractive price from a mid-term perspective, expecting remarkable performance improvements starting this year.

Jo Yoon-ho, a researcher at DB Financial Investment, said, "Even excluding the overused equity value, the fundamentals of the construction and other business divisions stand out," evaluating it as "a very cheap stock whether viewed from operating value or equity value."

However, the biggest risk to record-high performance is uncertainty due to the impact of COVID-19. Kyobo Securities forecasts Samsung C&T's sales this year at 32.6 trillion KRW (YoY +7.8%) and operating profit at 1.2 trillion KRW (YoY +44.0%). They expect all business divisions?including construction (YoY +13.6%), trading (YoY +59.6%), fashion (YoY turning profitable), resort (YoY loss reduction), food and beverage (YoY +0.0%), and biologics (YoY +53.8%)?to improve profits as the impact of COVID-19 diminishes, achieving record-high operating profit. Baek emphasized, "While the direction of performance improvement is expected to remain unchanged, uncertainty remains due to the potential resurgence of the COVID-19 pandemic." This means that if the fourth wave of COVID-19 slows the reduction of losses or the return to profitability, the extent of performance improvement will inevitably be limited.