Samsung Heavy Industries’ shipyard on Geoje Island in Gyeongsang Province / Courtesy of Samsung Heavy Industries
By Anna J. Park
While Samsung Heavy Industries is planning to vote on its capital reduction plan as well as issuing new shares at its June 22 shareholders’ meeting, the market hasn’t yet responded positively to the news, as the firm’s shares have continued to hover at around 6,000 won ($5.40) during the past few weeks.
Samsung Heavy announced earlier this month that it was seeking to improve its financial status through both capital reduction without refund and the new capital increase of about 1 trillion won through issuing new shares, yet the market has been giving the cold shoulder to the plan.
It’s extremely rare for a major firm, like a Samsung subsidiary, to announce a plan for capital reduction without refund, publicly proving the company’s dire financial situation. Also, the market participants view that unless there’s a significant change in the firm’s actual business models, the plans for both the capital reduction as well as the issuance of new shares will end up having a temporary and limited effect on the firm.
With these concerns discouraging investor sentiment, the company’s shares nosedived upon the capital reduction announcement earlier in the month, from a closing price of 7,780 won on May 3 to 5,620 won on May 6, a 27 percent drop in a few trading sessions. Ever since, the price remained below the 6,000 won mark, until Monday.
On Monday, the last day of May, the share price finally rose by 2.89 percent, closing at 6,050 won, the first time in nearly three weeks it climbed above the 6,000 won mark.
Hanwha Securities’ research center published a buying report on the share, with a target price of 7,000 won, stating while a large operating loss is still expected for this year, the dual-layered plan of capital reduction and issuance of new shares has eliminated a significant level of uncertainty surrounding the firm.
“While a huge amount of annual losses is unavoidable for this year, with an operating loss of around 734 billion won anticipated for this year amid expected annual revenue of 6.9 trillion won, the announcement of the capital raise of around 1 trillion won by issuing new shares has somewhat removed the firm’s uncertainty,” the report read.
However, not all market experts are this optimistic about the firm’s forecast.
As of the end of the first quarter, Samsung Heavy’s total capital stood at 3.1 trillion won, which is more than a 15 percent fall from the end of last year when it stood at 3.7 trillion won. The firm has also logged six consecutive years of annual losses since 2015, and this year is also expected to mark another annual loss of 734 billion won. Market watchers say the problem will be solved only by improving the firm’s fundamentals, rather than temporary measures like issuing new shares.
“Samsung Heavy Industries’ plan of reducing capital without refund has an effect of delaying a possibility of impaired capital ― a company’s total amount of capital becomes less than the par value of its shares outstanding. However, the plan only changes the structure of the capital, with almost no positive impact on the firm’s credit ratings,” said Kim Yeon-su, a researcher at NICE Investors Service.