Entering 5-to-1 Free Capital Reduction
Debt Ratio Expected to Decrease After Completing Anticipated November Capital Increase
[Asia Economy Reporter Gong Byung-sun] Samsung Heavy Industries, which had been struggling with deteriorating financial structure, has begun a free capital reduction. The securities industry predicts that if the subsequent paid-in capital increase is completed after the free capital reduction, Samsung Heavy Industries' financial structure will pass through the worst situation.
According to the Korea Exchange on the 23rd, Samsung Heavy Industries will be suspended from trading from today until August 9. The reason is the free capital reduction. On the 22nd of last month, Samsung Heavy Industries decided on a 5-for-1 free capital reduction to reduce the face value from 5,000 won to 1,000 won through an extraordinary general meeting of shareholders. There is no change in the number of issued shares.
A free capital reduction refers to reducing capital stock by reducing the stock amount or number of shares in companies with poor financial structures to eliminate deficit. Currently, Samsung Heavy Industries' retained earnings deficit amounts to 504 billion won. A retained earnings deficit can cause capital erosion where total capital is less than capital stock, which is one of the factors companies are most cautious about.
Operating profit and loss, which affects retained earnings, is expected to show a deficit again. Retained earnings are settled after deducting other operating income and expenses and corporate tax expenses from operating profit. Daishin Securities predicted that following the earnings shock in the first quarter, Samsung Heavy Industries will record an operating loss of 147 billion won in the second quarter.
Samsung Heavy Industries plans to reduce its capital stock from about 3.1506 trillion won to 630.1 billion won through the free capital reduction. The reduction amount of 2.52 trillion won will be incorporated into capital surplus and used to resolve concerns about capital erosion. Lee Dong-heon, a researcher at Daishin Securities, evaluated, "This free capital reduction is a preemptive measure to maximize the effect of financial improvement."
The securities industry consensus is that attention should also be paid to the paid-in capital increase to be carried out following the free capital reduction. The purpose of the paid-in capital increase, expected to be conducted in November, is also to improve the financial structure. Since the number of shares will increase, volatility in stock prices during the paid-in capital increase process is inevitable, but it is expected to reduce the rapidly increasing debt ratio. The debt ratio, which was 159% in 2019, rose to 248% last year and is expected to reach 321% this year. The researcher predicted, "If the paid-in capital increase is completed, the debt ratio will fall to 238%, and if loan repayments are completed, the debt ratio can be reduced to 198% by the end of this year."
The funds secured through the paid-in capital increase will also be invested in future competitiveness. Funds will be invested in new technology development such as next-generation fuel technologies using hydrogen and ammonia to respond to strengthening environmental regulations and smart ship solutions capable of autonomous navigation. Choi Jin-myung, a researcher at NH Investment & Securities, said, "It is expected to take at least two years or more to normalize profitability," but added, "Samsung Heavy Industries will be a beneficiary when environmental regulations and ship replacement cycles arrive."
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