Samsung flags profit jump despite damaging recall

Samsung Electronics on Friday flagged a 5.5-percent rise in operating profits, even as it struggles with a damaging global smartphone recall and a shareholder push to split the family-run conglomerate in two.

In an earnings forecast that beat analyst estimates, Samsung said its operating profit for the July-September period would stand at around 7.8 trillion won ($7.0 billion), compared to 7.39 trillion won a year ago.

The estimate was down on the 8.1 trillion won profit posted in the second quarter.

The world’s largest smartphone maker has had a turbulent time of late.

Just weeks after the early roll-out of the Galaxy Note 7 “phablet”, Samsung was forced in early September to recall 2.5 million units globally following complaints its battery exploded while charging.

With images of charred phones flooding social media, the unprecedented recall was a humiliation for a firm that prides itself as an icon of innovation and quality — and the timing of the crisis could not have been worse.

– Growth blow –
The Note 7 was meant to underpin growth this year as Samsung struggles to boost sales, squeezed by Apple in the high-end sector and Chinese rivals in the low-end market, as profit has stagnated.

Analysts have estimated the cost of the recall at $1.0 billion to $2.0 billion.

Friday’s forecast, which comes ahead of audited results to be released this month, did not provide a net income figure or breakdown of divisional earnings for the company’s mobile, TV, semiconductor and display units.

It predicted third-quarter sales of 49 trillion won, down from 51.7 trillion won a year ago.

Analysts said the impact of the Galaxy recall on the mobile division appeared to have been mitigated by strong demand for memory chips and OLED display panels.

“The third quarter was affected by the Note 7 recall but at the same time, there were improvements in the semiconductor section,” said Greg Roh, an analyst at HMC Investment Securities.

“For now, the situation is better than expected. The outlook for the mobile division in the next quarter isn’t too bright, but it will be balanced against improved performances in memory chips, semiconductors and OLED display panels,” Roh said.

Samsung’s share price rose by as much as 1.2 percent in early trade after the announcement.

– Chip profits –
The world’s number two chipmaker has dominated production of faster, larger-capacity chips using a technology called 3D NAND.

Samsung plants at home and in China were the first to mass produce the high-margin chips — used in mobile gadgets and hard drives for servers.

Samsung’s handling of the Note 7 recall placed a spotlight on the South Korean conglomerate’s management at a time when it is navigating a tricky generational power transfer within the founding Lee family.

Industry experts have criticised the Lee dynasty for controlling the vast group through a complex web of cross shareholdings, although they only directly own about five percent of total stocks.

On Wednesday, the US hedge fund Elliott Management stirred the pot by unveiling a proposal to streamline Samsung, split the company in two, dual-list the resulting operating company on a US exchange and pay shareholders a special dividend of 30 trillion won ($27 billion).

Samsung responded warily, saying it would “carefully review” the plan, which pushed the company’s share price to a record high on Thursday.

Entities controlled by Elliott, the hedge fund run by billionaire Paul Singer, own about 0.62 percent of Samsung.