Korea Investment & Securities Maintains Overweight on Three Major Telecoms... KT Remains Top Pick

Korea Investment & Securities has maintained its 'overweight' and 'buy' recommendations for the three major telecom companies, stating that their profitability will continue to improve in the second half of this year. However, the firm noted that each company will inevitably show differentiated trends, with SK Telecom expected to see a decline in performance starting in the second quarter due to subscriber churn and rising costs. KT was presented as the top pick.

On May 22, Kim Jungchan, a researcher at Korea Investment & Securities, stated in the report 'Wireless Telecommunications - Telecom Services: Second Half Outlook and Key Checkpoints' that "telecom companies will continue to see improvements in profitability in the second half of the year as key operating expenses remain stable or decrease."

Kim identified the following as major events for the upcoming second half: the implementation of the repeal of the Mobile Device Distribution Improvement Act (Dantongbeop), the announcement of spectrum allocation plans by the Ministry of Science and ICT, and the finalization of Release 19 standards by the international mobile telecommunications standards organization 3GPP. He commented, "The repeal of the Dantongbeop will increase marketing expenses for telecom companies," but also highlighted positive aspects such as "an increase in average revenue per user (ARPU) due to the expansion of premium plans, a shortening of device replacement cycles, and a rise in 5G penetration rates."

He also pointed out that spectrum allocation and 3GPP Release 19 will determine the direction of telecom companies' capital expenditures (CAPEX) and could accelerate 5G Advanced. He explained, "Currently, companies are reluctant to invest in 5G Advanced, but there is ample justification for active adoption to comply with global standards and enhance artificial intelligence (AI) competitiveness. Since these investments do not entail excessive cost increases, CAPEX stabilization is expected to continue." He further noted that, in terms of 5G Advanced infrastructure competitiveness, KT, which already established 5G SA in 2021, is likely to have the upper hand.

Accordingly, Kim stated, "We maintain our overweight stance on the telecom sector and buy recommendations for all three companies," adding, "Our top pick is KT, followed by LG Uplus and SK Telecom in terms of sector preference." He continued, "All three companies are expected to maintain their existing plans to enhance corporate value in the second half, driven by strong shareholder return policies. While all three posted strong results through the first quarter, differentiated trends are expected to emerge from the second quarter onward."

Specifically, he projected, "KT will see a significant annual improvement in profitability due to restructuring effects and real estate sales revenue in the first half, and B2B growth will accelerate with the launch of Secure Public Cloud (SPC)." He also noted that the company’s share buyback program is proceeding smoothly through August, and there is considerable potential for additional dividend increases due to improved earnings.

For LG Uplus, he viewed the company as being at the early stage of an earnings turnaround, with the start of share buybacks in the second half and a comfortable foreign ownership limit as positive factors. Regarding SK Telecom, which recently experienced a USIM data leak incident, he stated that performance deterioration due to subscriber churn and rising costs will become evident from the second quarter. "With risks still present, a conservative approach is necessary. We recommend a dividend-focused approach with a medium- to long-term holding strategy," he suggested.