January 8, 2019 / 3:29 AM / 3 months ago

Breakingviews - Samsung’s bad news intensifies $70 bln cash bind

H.S. Kim, president/CEO of Consumer Electronics Division, Samsung Electronics speaks during a Samsung news conference at the 2019 CES in Las Vegas, Nevada, U.S. January 7, 2019. REUTERS/Steve Marcus

HONG KONG (Reuters Breakingviews) - Samsung Electronics’ bad news intensifies its $70-billion bind. The South Korean giant says its fourth-quarter operating profit will tumble 29 percent compared to a year earlier, to a worse-than-expected 10.8 trillion won ($9.7 billion). With chip prices set to fall further, there is comfort to be found in the group’s ballooning cash pile. Scion and de facto boss Jay Y. Lee can boost investor returns and invest more energetically in new tech, from 5G to autonomous driving.

Tuesday’s bleak guidance from the world’s top handset and chip maker confirms fears of a quicker-than-expected downturn in smartphones and semiconductors. Just last week, Apple boss Tim Cook rattled markets by lowering the iPhone-maker’s quarterly sales forecast, blaming cooler Chinese demand. Meanwhile, a supply glut is squeezing prices for memory chips, Samsung’s key profit driver. Analysts at Nomura reckon annual sales globally will contract by a fifth to $122 billion in 2019.

Samsung will disclose detailed earnings later this month, but its rare early warning is clear: “difficult conditions” in the memory chip market will continue in the first three months of this year. Its shares have already slumped by a quarter over the past 12 months, and trade at just 6 times forward earnings; Apple and rival chipmaker Intel fetch nearly twice that.

The 50-year-old Lee, who is appealing a suspended sentence for bribery and other charges, can nevertheless appease investors. To date, corporate governance and shareholder returns have been poor at the family-run conglomerate. Egged on by U.S. activist investor Elliott, Lee has taken small steps. In 2017, the company committed to pay out at least half of free cash flow back to shareholders. He has also turned to new areas of growth, like biotechnology and connected cars.

But much more can be done, not least thanks to a $68 billion net cash pile that will top $100 billion by the end of 2019, according to some analysts. Thanks to spending cuts, Nomura estimates free cash flow will increase by 13 percent to nearly $35 billion this year, even if operating profit weakens. Handing more back to shareholders - through dividends or buybacks - is one option. Spending to catch up with global peers in next-generation wireless technology and artificial intelligence is another.   

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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