Samsung expects 50% jump in Q4 operating profit despite Note 7 debacle

Samsung expects 50% jump in Q4 operating profit despite Note 7 debacle
People walk by a Samsung store in New York's Lower Manhattan.
PHOTO: AFP

Consumer electronics giant Samsung on Friday predicted a near 50 per cent jump in its fourth-quarter operating profit, with the components business expected to offset declines in its mobile unit that was marred by discontinuation of the fire-prone Galaxy Note 7 handsets.

In a regulatory filing, Samsung said it expected consolidated operating profit for the October-December 2016 quarter to be 9.2 trillion won (S$11.2 billion), up from the 6.14 trillion a year earlier, and beating a Thomson Reuters StarMine SmartEstimate forecast of 8.2 trillion won.

The fourth quarter profit number, if realised, would be the highest profit figure in three years, according to Reuters. But Daniel Kim, an analyst at Macquarie Equities Research, pointed out on CNBC's "Squawk Box" that the major difference was back in 2013, that profit growth was driven by the mobile phone division.

Investors reacted positively to the guidance, with Samsung shares climbing more than 2 per cent in morning trade on Friday, beating the broader benchmark index.

Analysts agreed Samsung's business diversity and competitiveness in areas of flash memory, memory and OLED displays helped overcome the bungled Note 7 recall and will continue to support it in 2017.

"The Semiconductor division should be the main source for better-than-expected earnings," Daniel Yoo, head of global strategy at Kiwoom Securities, told CNBC's "The Rundown" before the earnings guidance was released.

Samsung's components business supplies memory chips and display panels to other companies, including prominent smartphone makers such as Apple.

Yoo said that a combination of higher memory chip prices, increased volume due to greater demand and a sharp depreciation of the Korean won could see the components business post strong numbers for the quarter. In the fourth quarter of 2016, the won fell 8.73 per cent against the dollar.

The momentum from the components business is expected to continue into 2017, which, along with a recovery in its mobile business, could see Samsung post record numbers. "This time, Samsung is firing on all engines," Macquarie's Kim added.

Performance of the mobile business is expected to rebound in the fourth quarter and continue on an upward trajectory in 2017 on the back of the new flagship Galaxy S8 series, due to be released in the second quarter, the analysts said.

"The damage done by the Note 7 wasn't as bad as everybody expected, if you are looking at how Samsung sold versus Apple," Patrick Moorhead, president and principal analyst at Moor Insights and Strategy, told CNBC's "Street Signs."

Data from research firms International Data Corporation (IDC) and Strategy Analytics revealed last October that in the third quarter, amid the ongoing Note 7 troubles, Samsung's smartphone market share was roughly 20 per cent, versus second-placed Apple's 12 per cent on average.

Despite its overall dominance of the smartphone market, Samsung had booked a sharp 96 per cent on-year decline in operating profit in the third quarter as a result of the Note 7 recalls.

Problems with the Note 7 handsets began just days after its launch in August, with reports of some phones catching fire. In early September, Samsung issued recalls of Note 7 handsets, offering replacements. But shortly after, reports suggested the replacement devices were also catching fire, leading to Samsung permanently discontinuing the model.

In October, the electronics giant said it expected to take a 2.5 trillion won profit hit for the quarter and another 1 trillion won for the January-March quarter. Samsung has yet to disclose the reasons why the devices were catching fire but reports suggest such a disclosure is forthcoming.

Analysts believe it could go a long way in restoring user confidence in Samsung's mobile products.

"It's good to know that the company has found a root cause of the Note 7 issue, and that will clear any concern on the launch of the S8, which is their more important flagship smartphone model," said Kim.

For the full year, Samsung expects a 10 per cent on-year increase in operating profit and revenue at 201.54 trillion won.

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