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Lowered expectations for 2025

4Q24 preview: Expecting in-line revenue and below-consensus OP

For 4Q24, we expect Samsung SDS to report revenue of W3.6tr (+6.7% YoY; in line with the consensus) and operating profit of W235bn (below the consensus of W250bn). Profits were likely pressured by additional costs in both the IT services and logistics segments. For IT services, we estimate revenue at W1.61tr (-0.3% YoY) and operating profit at W197bn (+5.3% YoY; OP margin of 12.2%). Some product development-related costs were concentrated in the quarter, and the company disclosed that the value of its supply contracts with Samsung Electronics’ DX and DS divisions for 2024 did not grow significantly (rising just 1% and 3% YoY, respectively). That said, cloud revenue likely continued strong growth (estimate: +25% YoY to W695bn). For logistics, we estimate revenue at W1.99tr (+13% YoY) and operating profit at W38bn (+38% YoY; OP margin of 1.9%), affected by sluggish customer shipment volumes.

Lower TP by 20.9% to W191,000

We lower our target price for Samsung SDS to W191,000 (from W231,000), applying a P/E of 19x (10% discount to five-year average of 20x) to our 2025F EPS. For 2025, we forecast revenue at W14.51tr (+5.2% YoY) and operating profit at W1tr (OP margin of 7%), which are 2.5% and 9% lower than our previous estimates, respectively.

Uncertainty in the IT services industry has increased due to the domestic economic downturn and weak earnings across affiliate companies. While generative AI and cloud adoption remain priorities, many companies are likely to delay investment decisions. Indeed, last year, Samsung SDS lowered its 2025 AI revenue guidance from W300bn to W200bn due to delays in affiliates’ adoption of its AI solutions, including Brity Copilot. In addition, demand for GPU cloud services has been weaker than expected due to lower-than-anticipated use of AI applications.

Core strengths to come into focus as AI-driven changes accelerate

Despite lowered expectations for 2025, Samsung SDS should play a critical role in enabling digitalization as the IT paradigm increasingly shifts toward AI. The firm is expanding its presence in the public sector (having secured a W19.5bn contract with Korea Customs Service to build an e-commerce platform) and broadening its non-captive customer base. In 2024, it acquired land in Gumi to begin constructing additional data centers. The firm also has ample cash holdings, creating potential for M&A-driven growth. The stock is trading at a 2025F P/E of 12x, a significant discount to its five-year average (20.2x). As such, we expect the stock to regain attention following the 4Q24 earnings announcement. We maintain our Buy rating on Samsung SDS.