IT service companies are entering new business domains in order to: 1) offset lackluster sales growth in the IT service market; 2) better deal with government regulations; and 3) better meet their respective group needs. We expect IT service companies to enter new businesses in which they can utilize their existing IT service technologies. Given the fact that it possesses the most aggressive M&A strategy in the industry, we present SK C&C as our sector top pick.
Entering new business domains in order to: 1) offset soft sales growth in IT service market; and 2) better meet group needs
- Recently, there has been a growing trend for IT service companies to enter new business arenas (particularly via M&As).
- We point out that conditions in the IT service industry are currently unfavorable. In detail: 1) sales in the IT service market are expanding at a sluggish pace (around 3% y-y); and 2) since 2012, large companies’ operations have been restricted in the public domain. Against this backdrop, IT service companies have been entering new business arenas (particularly via M&As) for a number of additional reasons, including: 1) their relatively high captive sales portion (exceeds 50%); 2) regulations relating to internal work funneling; 3) synergy efforts (aiming to strengthen synergies between group affiliates); and 4) governance issues.
Entering arenas in which they can utilize their existing IT service technologies
- IT service companies are mainly entering new business domains (non-IT service businesses) via in-organic growth. Despite sluggish sales growth in the IT service market, companies such as SK C&C and Samsung SDS (both are actively carrying out M&As) have been registering strong sales growth.
- There are a number of advantages to IT service companies utilizing their existing IT service technologies in new business areas, including: 1) cost savings (cheaper to start-up their new businesses); 2) efficiency improvements; and 3) the reinforcement of their on-line businesses. Accordingly, we expect IT service companies to continue entering new businesses going forward.
Top Pick: SK C&C
- We initiate coverage on the IT service sector with a Positive rating. In particular, we point out that large listed IT service plays that have entered new domains are seeing stronger sales growth than the overall IT service market.
- Given the fact that it possesses the most aggressive M&A strategy in the industry, we present SK C&C as our sector top pick. We predict that the firm’s 2015 sales will climb more than 15% y-y thanks to: 1) sales growth at its non-IT businesses (includes its semiconductor module subsidiary); and 2) additional M&A activity.
*Source: Woori Investment & Securities Co.