Why Capital Return, Not Phone Fires, Is The Focus For Samsung

Cash Return Opportunity Significant Near Term

Analyst Shawn Kim sees significant opportunity for Samsung to increase cash returns in the near term in the form of buyback and/or special dividends. This, according to the analyst, stems from the fact that the company had to discontinue its Note 7 recently and investors have been seeking an improved shareholder return policy.

Restructuring: Additional Catalyst

Morgan Stanley believes capital return expectations are widely shared by the market, going by the stock performance since the Note 7 scare. The firm believes higher capital returns would raise the possibility of Samsung restructuring and balance sheet optionality, which in turn could be potential additional catalysts for the stock.

Elaborating further, the firm said additional buybacks would be viewed as a precursor to a potential unlocking of value through a group restructuring. Separation into a holding and operating company is seen as one way of unlocking the value.

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Morgan Stanley sees two scenarios emerging from a potential buyback announcement:

• Higher sustainable ROE from both reduced leverage and potential share count.
• Rising potential for group restructuring, leading to greater transparency, revaluation of assets and higher dividend payments.

No Buyback: Path To Bull Case Upside Limited

However, if the company refrains from announcing a buyback, the firm raised the specter of the stock losing the 5–14 percent outperformance it notched up relative to its memory peer SK Hynix over two months. Consequently, the firm sees limited path to its bull case upside.

Rating, Price Target

Morgan Stanley estimates 35 percent free cash flow in 2016–2018 compared to the 30–50 percent management guidance. This would yield a 26–30 percent payout ratio for 2017/18, up from 17 percent in 2016. The firm has a 1,800,000 won price target for the shares of the company and an Overweight rating.

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