Daily meeting notes

Tuesday, January 28, 2003 (11:40)
Samsung Electronics (0593)

Marketperform (maintain)

Current price (Jan 27) W299,000 Fair value: Current price
Predictions over bottom end share prices
Samsung Electronics (SEC) has suffered a sharp share price drop and short-term growth slowdown. As a result, risks are mounting against the companys fair value. Considering this, we estimate the low end for SECs fair value at W226,000 based on historical valuation multiples. Comment: After reviewing SECs report on 4Q02 results and relevant strategic issues, we downgraded our recommendation from BUY to Marketperform on Jan 17. The downgrade came as we changed our stance to conservative approach toward DRAM market conditions in Nov 2002, and lowered expectations for earnings from the TFT-LCD and handset businesses. The most sensitive factor for SECs fair value calculation is historical valuation multiples. In the long run, SEC should stand on equal footing with big names in the US or Europe in terms of valuations. However, SECs EPS growth has stalled at W40,000 and FY03F NP is expected to fall YoY. As such, we think the average historical valuation multiples are appropriate to calculate short-term fair value. With regard to the average historical valuation multiples, we reviewed SECs performance since 1999. Prior to 1999, multiples were affected by too many nonoperating factors such the currency crisis, governance risks and etc. In the short term, we base the valuation SECs fair value band based on historical valuation multiples
(x) Multiples PER EV/EBITDA PBR Average (W) 5.9 3.1 1.5 Low FV 219,625 212,011 245,271 225,636
multiples applicable to FY03F results on multiples from the past four years (1999-2002). During that time, PER averages 9.1x (maximum: 13.3x; minimum: 6.0x), EV/EBITDA 4.8x (max: 6.9x; min. 3.2x) and PBR 2.3x (max: 3.3x; min. 1.5x). Based on our FY03F results, SECs share price is near the valuation average from the past four years, which this hints that an additional share price hike would require: 1) higher valuation multiples; or 2) upward forecast revisions. But with current indices in Jan, it is difficult to revise up our forecasts. In particular, SEC is expected to suffer shrinking profits, with OP and NP dropping 16.3%YoY and 17.7%YoY in 1H03. At the same time, forecasts for global PC and DRAM sales have dropped further. All in all, we think SECs fair value may fall below the historical average valuation multiples due to the companys sluggish performance if the forecast of SECs future performance is revised down again. In a nutshell, SEC would be attractive at a price level between: 1) the average; and 2) the low end of valuation multiples from the last four years. In other words, the counter should trade at PER of 6.0-9.1x, EV/EBITDA of 3.2-4.8x and PBR of 1.5-2.3x. Applying these multiples to FY03F results, we derive a fair value band of W226,000-348,000. Therefore, fair value should be W287,000 before the counter manages a turnaround and W226,000 is the theoretical bottom. Based on this, we suggest fair value of W287,000 (with the bottom price of W226,000 based on current valuation multiples as of Jan 2003). For more details, please refer to our SEC report.
Simon Woo, CFA / (822) 2003.1840 / simon.woo@hrcviews.com
Mean Multiples 9.1 4.8 2.4 FV 341,827 312,115 391,265 348,402 Multiples 13.5 7.0 3.5
High FV 504,691 442,125 576,211 507,675
Note: Based on multiples from 1999-2002. We derived the average for the highest, mean and lowest figures, which we applied to calculate the high, mean and bottom prices. Source: Hyundai Securities

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