[Click eStock] "Samsung SDS, Need to Address Concerns Over Growth Slowdown... Target Price Down"

[Asia Economy Reporter Song Hwajeong] Samsung Securities on the 28th lowered the target price for Samsung SDS from the previous 250,000 KRW to 190,000 KRW, citing the need to alleviate market concerns about slowing growth. The investment rating was maintained at 'Buy.'

Odonghwan, a researcher at Samsung Securities, explained, "Reflecting the delayed recovery in the IT services sector, we have lowered next year's earnings per share (EPS) estimate by 5.1% and reduced the target price by 24% compared to the previous level, considering the valuation decline due to slower profit growth."

Samsung SDS's third-quarter performance this year showed stagnant profit growth due to increased costs. Third-quarter sales rose 13.9% year-on-year to 3.3813 trillion KRW, exceeding market consensus by 4.0%, but operating profit increased by only 1.0% to 222 billion KRW, falling short of consensus by 4.4%. Researcher Oh analyzed, "IT services sales increased by only 3.3% due to slow recovery in orders from affiliates, while logistics business process outsourcing (BPO) sales grew 22.6%, driven by continued strong freight rates in aviation and shipping, leading overall sales growth. Profit growth stagnated due to delayed recovery in high-margin IT services sales and rising developer labor costs."

The rebound in IT services sales growth is slower than expected due to delayed recovery in IT investments by affiliates. Operating profit margins in the IT services sector are also declining due to rising developer labor costs and new hires for the cloud business. Researcher Oh stated, "Considering the nature of the IT market where investments increase following economic recovery, it will take time for sales growth in the IT services sector to recover. Since margin pressure from rising labor costs and increased proportion of external sales is significant, profit growth recovery will be slower than sales growth recovery."

Expansion of external sales is expected to be key to growth. Researcher Oh said, "Samsung SDS's dependence on group company sales remains above 80%, and to secure continuous growth regardless of fluctuations in group IT investments, expanding the proportion of external customers is necessary. The company plans to enhance service competitiveness centered on cloud, security, and logistics sectors to expand external sales."

To raise valuation, alleviating market concerns about slowing growth is necessary. Researcher Oh added, "To recover growth and profitability, it is necessary to actively pursue infrastructure investments or mergers and acquisitions (M&A) using the cash holdings of around 4 trillion KRW to secure mid- to long-term growth drivers."