Samsung Miss in Worst Season Since 2006 Jars Bulls

Stock strategists are cutting forecasts for gains in South Korea amid the most widespread profit disappointments in seven years.

Samsung Electronics Co. and Posco are among the 74 percent of Kospi index companies whose fourth-quarter earnings missed analyst projections, on track for the highest proportion since the second quarter of 2006, data compiled by Bloomberg show. The benchmark Kospi index is recording its worst start to a year since 2010 as results trail estimates by the most among emerging-market countries tracked by Morgan Stanley.

Market forecasters who predicted two months ago that the South Korean stock gauge would surge to a record are now reducing targets as a combination of currency strength, lower-than-anticipated exports and falling retail sales erode profits. While bulls such as Standard Chartered Plc predict shares will rally as global economic growth accelerates, BNP Paribas SA said the results are casting doubt on its overweight position.

“It’s one of the worst in Asia” this earnings season, Manishi Raychaudhuri, an Asia-Pacific equity strategist at BNP Paribas, France’s largest bank, said in a phone interview from Mumbai yesterday. “Our current overweight in Korea stands, but it seems to be questioned by this earnings trend.”

Shinhan Investment Corp. reduced its Kospi target by 5 percent to 2,200 on Feb. 3 and Korea Investment & Securities Co. cut its forecast by 4 percent two days later. Samsung Securities Co. has also lowered the high-end of its target by 4 percent.

Foreign Outflows

The benchmark gauge of South Korea’s $1.1 trillion stock market fell 0.5 percent to 1,926.96 at the close in Seoul trading. Strategists at 15 firms surveyed by Bloomberg in December predicted the Kospi would rally to 2,341 this year, exceeding its record close of 2,228.96 in May 2011.

The Kospi has dropped more than twice as much as the MSCI All-Country World Index in 2014 as reduced Federal Reserve stimulus spurred investors to cut holdings in developing nations while manufacturing data signaled a slowdown in China, South Korea’s biggest overseas market. Foreign money managers have sold a net $2.3 billion of Seoul-traded shares this year.

Fourth-quarter net income in South Korea has so far trailed estimates by 29 percent, Morgan Stanley wrote in a Feb. 12 report. The 74 percent of Kospi index companies that trailed analysts’ expectations compares with an average of 52 percent during the past seven years, data compiled by Bloomberg show. About 61 percent of MSCI Emerging Markets Index companies have trailed estimates, while the proportion is 32 percent for the MSCI World Index of advanced-country shares.

Global Growth

Samsung, the world’s biggest smartphone maker and South Korea’s biggest company by market value, reported the slowest profit growth since 2011 on Jan. 24 as currency moves cut the value of overseas sales and growing competition in the handset market eroded profit margins.

Lotte Shopping, the operator of department stores and discount stores which gets most of its revenue in South Korea, plunged to a five-month low in Seoul last week after earnings trailed estimates. Posco, the nation’s biggest steelmaker, posted a 44 percent tumble in 2013 earnings amid waning demand from builders of ships, cars and houses.

Posco is more optimistic about the outlook for 2014, predicting a global economic revival will help lift sales this year. That may also provide a boost to the broader South Korean equity market, according to Standard Chartered.

One-Time Losses

U.S. economic growth has picked up and there’s a “broad improvement” in the labor market of the world’s biggest economy, Federal Reserve Chairman Janet Yellen told lawmakers on Feb. 11. While an official gauge of Chinese manufacturing dropped to a six-month low in January, data yesterday showed the nation’s export and import growth accelerated.

“The global backdrop continues to steadily improve and that’s the fact that drives us to be constructive both on Korea and for the cyclicals in the Korean market,” Clive McDonnell, an equity strategist at Standard Chartered in Singapore, said in a phone interview on Feb. 10. He has a Kospi target of 2,400, or 24 percent above yesterday’s close.

Some of the earnings disappointments may have been caused by one-time accounting write-offs coinciding with the appointment of new corporate managers who want to frontload losses, according to Morgan Stanley and JPMorgan Securities.

KT Corp., South Korea’s second-largest telecommunication services provider whose new chief executive took the helm in January, reported a one-time 110 billion won ($104 million) loss in the fourth quarter, according to Samsung Securities. The company is working to improve earnings, KT spokesman Kim Dong Woo said by phone yesterday, declining to comment on the fourth-quarter results.

Earnings Outlook

“The bottom line is that these are just one-offs, so it will probably not recur,” Shawn Kim, the head of Korea equity at Morgan Stanley, said by phone from Seoul on Feb. 11.

South Korea’s economic data has shown a fragile recovery. Exports unexpectedly declined in January while the unemployment rate recorded a surprise increase. Department store sales dropped 0.3 percent from a year earlier in December. The won declined 1.5 percent this year, after an advance of almost 10 percent in the previous two years. The three-year government bond yield fell three basis points to 2.86 percent this year.

Earnings projections for South Korea are still too high, according to Samsung Securities. Net income will probably grow between 6 percent and 7 percent this year, versus the consensus analyst estimate of 24 percent, You Seung Min, the firm’s chief strategist, said by phone from Seoul on Feb. 11.

The Kospi is valued at 9.3 times analysts’ estimate for 2014 earnings, in line with the MSCI Emerging Markets Index, according to data compiled by Bloomberg. The Korean gauge was trading at an 8 percent discount 12 months ago.

“With the outcome of fourth-quarter earnings, expectations for the first three months of this year have gone lower,” said You.

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