Fitch Ratings has today affirmed Samsung Electronics (SEC) Long-term foreign currency Issuer Default Rating (IDR) at 'A+', and revised the Outlook to Stable from Negative. Fitch has simultaneously assigned SEC a Long-term local currency IDR of 'A+' with a Stable Outlook, as well as senior unsecured ratings of 'A+' to its two outstanding foreign currency senior unsecured bonds aggregating USD115m.
The Outlook revision to Stable reflects SEC's robust consolidated operating results for Q110, following on from the financial year ended 31 December 2009 (FY09), as well as Fitch's expectations for the company's financials to continue to improve against the backdrop of a positive industry outlook, and its dominant market positions across its major business divisions.
On May 17th SEC announced a revised capex plan of KRW25.2trn for May 2010-June 2011 compared with actual capex of KRW8.53trn in FY09. With actual spending likely to be spread over FY10-FY11, the agency believes the amounts will not be significant enough to place negative pressure on the company's current ratings given its abundant cash position and strong cash generating ability. In addition, the agency notes that the increased capex could lead to an even stronger market position in the long term, especially in the memory business, given that some of its competitors are currently financially constrained.
Fitch forecasts very strong growth in SEC's key business areas - mainly memory and TFT-LCD - driven by increasing demand for the end-applications of its products. Fitch also retains a positive view on its LCD TV business. Although continued, but mild, erosion in average selling prices is expected for SEC's main products, the agency estimates that strong shipment levels will be able to compensate for this loss.
SEC is likely to sustain a stable margin in its mobile handset business, driven by its expanding market share and a well-balanced product mix. Although its current position in the smartphone sub-sector is weak, Fitch believes SEC will be able to slowly increase its 3.5% share from H210. Also, the negative impact of the appreciation of the Korean Won against the US Dollar and the Euro, compared to FY09 levels, is estimated to be limited given the improvement in the company's profitability in Q110.
In FY09 SEC demonstrated its operational sustainability in withstanding the economic downturn by recording consolidated revenues of KRW138,993trn - 14.6% growth yoy - with an EBIT margin of 8.3% (FY08: 4.97%). Continuing its momentum from H209, SEC registered a solid performance in Q110 with revenues of KRW34.64trn - a 13.3% decline QoQ reflecting a weak seasonality - but a QoQ 28% improvement in its operating profit level mainly backed by the strong recovery of its memory business.
SEC intends adopting K-IFRS from FY10 which will allow it to exclude Samsung Card (35.3%-owned) from the scope of consolidation, though this subsidiary will be reflected under the equity method; this is consistent with Fitch's historic method of assessing the company (where financial metrics excluding Samsung Card have been used). Under this method, SEC has successfully maintained a healthy financial profile with a net cash position at the end of FY09; the agency notes that this is rare for tech companies with similar business portfolios, not just in the Asia Pacific region but globally.
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