Samsung deploys cash pile with S$14b share buyback, capital spending boost

Samsung Electronics' headquarters in Seoul on Oct 7, 2015.
Samsung Electronics' headquarters in Seoul on Oct 7, 2015.PHOTO: AFP

SEOUL (BLOOMBERG) - Samsung Electronics is tapping its US$50 billion (S$70.15 billion) cash pile to buy back shares and invest in its components business after struggles in the smartphone business battered investors. Its shares surged.

The company will buy back and cancel 11.3 trillion won (S$14 billion) and boost capital spending by 14 per cent this year, Samsung said on Thursday (Oct 29). The announcements came after the company posted profit that trailed analyst estimates.

Samsung is struggling for an answer to Apple in high-end smartphones, trying price cuts, a US$120 (S$168) rebate programme and new models to tempt consumers from buying iPhones. That has prompted a renewed focus on making components for earnings growth, with new semiconductor and display plants to get its parts into other vendors devices.

"An aggressive buyback with cancellation was a huge surprise," said Mr Greg Roh, an analyst at HMC Investment Securities in Seoul. "The company had to better respond to outside investors and the latest move shows that Samsung is trying to push shareholder returns level to be in line with global peers."

Shares of Samsung rose 4.9 per cent to 1,372,000 won as of 10.11am in Seoul, the highest since May. The rally erased their decline for the year.

Capital expenditure will rise to 27 trillion won this year as the company invests in chips and display plants.

Third-quarter net income, excluding minority interests, was 5.31 trillion won, trailing the 5.4 trillion won expected by analysts.

"In the fourth quarter, the company expects earnings to decline from the earlier quarter, as it does not expect the foreign exchange rate to have a positive effect in the fourth quarter," Samsung said.

Operating profit at the mobile unit was 2.4 trillion won on sales of 26.6 trillion won. The company's inability to wrest back control of the premium devices market has shrunk profitability, with the operating margin narrowing to about 9 per cent in the quarter, or less than half what Samsung posted in the first quarter of 2014.

On Tuesday, Apple forecast another record holiday quarter aided by resilient iPhone demand as well as converts from Google's Android software, which drive most of Samsung's devices.

The rise of a clutch of Chinese smartphone makers such as Huawei Technologies and Xiaomi is also pressuring the Korean company.

"Samsung's mobile division fell sharply in 2014, it is stabilising in 2015, and we expect Samsung to regrow slightly in 2016," said Mr Neil Mawston, executive director of Strategy Analytics. "Selective price cuts and improved smartphone designs, such as the Galaxy S6 Edge and Note 5, are setting up Samsung for a decent shot at recovery next year."

Earnings at the chip unit rose to 3.66 trillion won from 2.26 trillion won a year earlier.

Semiconductors will continue to take the lead in driving Samsung's earnings into the fourth quarter, but the positive impact from the weaker Korean currency will likely be limited, according to Eugene Investment & Securities Co. Samsung is the world's biggest maker of memory chips.