"Don't Underestimate Poor Performance" Growing Expectations for Earnings... Should We Consider Buying Telecom Stocks in February?

[Asia Economy Reporter Lee Seon-ae] The investment attractiveness of the telecommunications service sector in February is "Clear." Although the sector is showing a sluggish trend due to expected poor performance in the fourth quarter, there is high anticipation for future performance improvement, making investment promising.

According to the securities industry on the 28th, the three major domestic telecom companies are scheduled to announce their Q4 2020 earnings in early February. The combined operating profit of the three telecom companies for Q4 2020 is expected to improve to 537.2 billion KRW (an 8.4% increase compared to the previous year). However, the operating profit of the three companies is expected to fall significantly short of the consensus (combined operating profit of 673.1 billion KRW), and due to a large impairment loss caused by the long-term non-use of the ultra-high frequency band (28GHz), net profit is expected to be weak, which is a burden.

The stock prices of telecom companies are also showing a sluggish trend. According to the Korea Exchange, SK Telecom's stock price increase rate was 5.9% as of the 27th this year. KT and LG Uplus recorded increases of only 1.1% and 4.2%, respectively. These figures fall short of the KOSPI's 6% increase during the same period. The telecom sector's recent one-month increase rate is 4.1%, and the three-month increase rate is 8.9%. The one-month excess return compared to the market is -10.2 percentage points, and the three-month excess return compared to the market is -27.1 percentage points, showing a weak performance.

Given this situation, there is little reason to hold telecom stocks during a soaring market, and investor sentiment is slow to recover. However, the general analysis in the securities industry is that a buying strategy is valid in February.

This is because the rapid increase in 5G subscribers is expected to sharply raise the proportion of 5G revenue in the total revenue of telecom companies. There is a high possibility that the guidance for 5G subscribers and average revenue per user (ARPU) will be revised upward, raising expectations for a rise in telecom stocks.

Hana Financial Investment, considering the current KOSPI level, has issued an overweight investment opinion on the telecommunications service sector in February, judging that telecom stocks are likely to record excess returns compared to the market after the early February earnings announcements.

Kim Heung-sik, a researcher at Hana Financial Investment, explained, "There are still many investors who do not recognize telecom stocks as 5G-related stocks, but with the increase in mobile phone revenue, telecom stocks will eventually recover the cost of 5G investment, leading to a rise in stock prices. It is important to recall that in the past, when mobile phone ARPU increased, most global telecom stocks saw significant stock price increases."