“Cornering the market in exploding phones” may not top the list of priorities for investors, but, Ben Lofthouse, manager of the Henderson International Income Trust, said Samsung’s troubles last year allowed him to pick up the stock at a bargain price.
Lofthouse said the hysteria that greeted the launch of Samsung’s embattled Galaxy Note 7 last year distracted the market from the company’s outstanding fundamentals.
The firm was forced to scrap its Galaxy Note 7 smartphones in 2016 when customers complained they were bursting into flames and airlines banned them over safety fears.
Last year the company said it expected the debacle to knock more than $5bn off its operating profit and its shares fell by 8 per cent after it was forced to recall the product.
Performance of Samsung over 5yrs
Source: Google Finance
However, Lofthouse said anyone who sold out at this point was missing the bigger picture.
“The fact is, there are only really two smartphones you think of when you buy a phone – either Samsung or Apple,” he explained. “Whereas if we go back to when we all first started to get phones, there were five or six. I think the stats tell you really who has won.”
Lofthouse also pointed out that while Samsung is best known to the man on the street for its handsets, its fate is more reliant on its technology, which is used in all mobile phones, including its competitors’. He said its valuation failed to take into account the enormous strides its R&D had made in this area.
“It had invested massively not just in phones but memory and OLED screens, yet people only really treated it like it had cornered the market in exploding phones,” he explained.
“It’s got a massive position in memory – 3D NAND is the next level. Effectively this works at a very micro level, sticking more layers on top of the chip so you get a stacked chip rather than a flat one.”
“All of this was available on 6x P/E so we invested heavily because it had cornered the market in these areas, it was making more than 10 per cent free cash flow yield and it had an activist on the board.” 
“People were asking it to pay out more of its cash balance over the years and weren’t valuing it for any of the technology it had. And over the last year it has increased its dividend by over 100 per cent again.”
However, Lofthouse (pictured) admitted that the exploding phones were not the only reason why people avoided the stock when it traded at such a low valuation.
“Again, the management team is in prison, which makes communications very difficult,” he continued.
“It’s not an easy stock to stomach, but you know why it is doing well and because of these reasons it traded on 6x P/E with a massive cash balance sheet. At the same time we were paying 20x for AstraZeneca after you strip out all the funny earnings and stuff like that. It’s not perfect, but it had invested to a point where it was just way ahead of everyone else. And it just wasn’t valued for it and so we bought that and it’s been a phenomenal investment.”
Samsung’s share price has almost doubled in value since the low that followed the recall of its Galaxy Note 7 phone.
Lofthouse said his decision to buy into Samsung follows his strategy of asymmetric risk, whereby the potential upside far outweighs the potential downside. This strategy can be applied at the sector-specific level as well as the stock-specific one and it is currently leading him to invest in banks.
“I don’t have a strong view on whether rates go up,” he said. “I think that it could be 50/50 whether 10-year rates are higher or lower by the end of the next year. What I’m interested in is trying to find sectors that price them in being lower so there’s upside if they are higher.”
“I buy financials because they are cheap and undervalued. And rates in most parts of the world are really low so lower rates can’t hurt them. But if they go up because there is growth I think there will also be upside in them.”
Henderson International Income Trust currently has around 20 per cent of its portfolio in financials. While this may seem like an excessive amount, Lofthouse said the global nature of his trust means that taking up such a large position is not as risky as going overweight this sector in a single country.
“One of the problems in financials is regulation – if I was just in the UK, I would probably find it harder to have 20 per cent in financials because you’ve got the same macro risk and the same regulatory risk, so it depends on whatever the regulator thinks and whatever government is in place,” he added.
“Left-leaning governments have been tempted to tax the financial services industry across the world in the past.”
“If we were to have a government change, you may see an impact on the banks. That type of risk is quite hard to diversify if you are in one country, so I own six or seven banks in different countries. That’s something we are trying to do with HINT – to diversify those risks to avoid the impact of value traps.”
Performance of trust vs sector & benchmark since launch
Source: FE Analytics
Data from FE Analytics shows Henderson International Income Trust has made 102.24 per cent since launch in April 2011 compared with 119.99 per cent from its MSCI World index benchmark and 101.79 per cent from its AIC Global Equity Income sector.
The trust is trading on a discount of 0.96 per cent, compared with discounts of 0.19 and 0.48 per cent from its one- and three-year averages.
It has ongoing charges of 0.88 per cent and is yielding 2.97 per cent. It does not currently use gearing.
Investors who put £10,000 into the trust at launch would have received £2,700.73 in income over this time.