October 5, 2018 / 3:37 AM / 2 months ago

Breakingviews - Samsung is closer to maxing out memory limits

Visitors in front of a Samsung logo during the preview day of the IFA trade show for consumer electronics and home appliances, in Berlin, Germany August 30, 2018. REUTERS/Christian Mang

HONG KONG (Reuters Breakingviews) - Samsung Electronics is close to maxing out its memory limits. South Korea’s $260 billion electronics conglomerate is on track for another quarter of record operating profit. Memory prices will probably peak by year-end, however. Slower earnings growth and the mounting legal woes of Samsung’s leaders will test investor patience.

The world’s top handset and memory chip maker expects operating profit in the three months to September to jump by a fifth from a year earlier to 17.5 trillion won, or $15.5 billion. Surging demand for DRAM chips, used in servers that power data centres, has pushed prices up by 14 percent year-on-year in the third quarter, according to industry tracker DRAMeXchange. Samsung’s leading 40 percent-plus market share give it massive scale and cost advantages. Bernstein analyst Mark Newman reckons DRAM gross margins at Samsung will hit a whopping 79 percent this year, well above rivals SK Hynix and Micron.

The so-called memory supercycle may be turning however. Demand has cooled, even as Samsung and peers continue to add capacity. Analysts now expect DRAM prices to start falling in the fourth quarter of this year. And while Samsung’s other businesses like display screens can help it cushion a memory slowdown, analysts polled by Refinitiv expect no annual growth in 2019 earnings.

Meanwhile, top company executives keep getting into trouble. Chairman Lee Sang-hoon was indicted by prosecutors in Seoul for his alleged involvement in sabotaging labour union activities between 2013 and 2016, just a few months after taking control of the board. This intensifies already serious legal uncertainties. De facto leader Vice Chairman Jay Y. Lee is still appealing his earlier conviction for bribery and other offences and was only released from prison in February.

Keeping investors onboard will get tougher. Share prices are down 12 percent since the start of the year and trade at some 6 times forward 12 months earnings, nearly half of what U.S. rival Intel fetches and far below Apple’s 16 times, Refinitiv estimates show. And while the South Korean group has already boosted dividends and buybacks, it still sits on a $61 billion cash pile. Impatient shareholders may demand Samsung start spending it, or hand it back.

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