Samsung Biologics: Reliable Value Play Free of Forex Market Woes

The author is an analyst of NH Investment & Securities. He can be reached at pk.park@nhqv.co. — Ed.

 

We expect Samsung Biologics to post non-consolidated 3Q22 OP of W307.1bn, topping consensus by 36% thanks to amicable forex market conditions and stronger-than-expected leverage effects. Moving ahead, its valuation burden is to ease alongside the blooming of the Alzheimer drug market and helped by the building of plant #5 (under construction).

Expect 3Q22 earnings surprise: Non-consolidated OP to top consensus by 36%

We maintain a Buy rating and a TP of W1.15mn on Samsung Biologics. Reflecting a hike in our risk-free rate assumption to 3.5%, we have boosted WACC to 7.2%. But, we adhere to our existing TP estimate in light of upward adjustments to our earnings forecasts. We expect Samsung Biologics to register a 3Q22 earnings surprise in terms of both its non-consolidated and its consolidated results. We see non-consolidated 3Q22 CDMO sales of W676bn (+50% y-y), with likely accompanying OP of W307.1bn (+83% y-y) to beat the market projection by 36%. On a consolidated basis, we estimate 3Q22 sales of W900.1bn (+100% y-y) and OP of W318.9bn (+91% y-y), with OP to trump consensus by 47%.

Amid a favorable forex market environment, the consensus projection for the firm’s 3Q22 consolidated OP has recently upped around 10%. While forex market effects are directly captured in its sales, Samsung Biologic’s raw materials are sourced via its partners—accordingly, cost increases due to forex market effects should prove limited. In turn, its OP leverage effects should prove stronger than consensus. In addition, with regular maintenance at plant #2 having wrapped up in 1Q22, being able to run at full utilization since 2Q22 also likely contributed significantly to the company’s 3Q22 earnings performance.

Plant # 4 completed; to make another leap forward with plant #5

Applying our research center’s forex market assumptions, we forecast non-consolidated 2023 OP of W952.3bn (+2% y-y), now predicting that y-y OP growth will be W103bn higher than our previous estimate after navigating a likely temporary slowdown. Although depreciation costs (SG&A expense side) will likely rise by W49.4bn y-y in 2023 due to expenses for the firm’s newly-completed plant #4, we believe that: 1) the positive impact of favorable forex market conditions will sustain through 1H23; 2) Samsung Biologics will continue to enjoy solid sales thanks to better operating efficiency (from being able to run at full utilization) allowing the company to respond in complete force to anticipated steady demand at its single antibody CMO business.

Recognition of sales from plant #4 are to begin in earnest from 2024, and Samsung Biologic’s EV should strengthen and its valuation burden should ease on the building of plant #5 (under construction) and the opening of the Alzheimer’s antibody market.