Telcos Feel Only Minimal Effects from COVID-19
The author is an analyst of NH Investment & Securities. He can be reached at jaemin.ahn@nhqv.com. -- Ed.
During the recent stock market drop, telcos failed to serve as defensives. As telcos’ earnings should feel only minimal effects from Covid-19, we expect their share prices to be highlighted during the 1Q20 earnings season.
Telcos losing role as defensives: Can they recover?
Telco shares have traditionally served as defensives, as sector earnings feel only minimal effects from changes in macroeconomic indicators such as oil prices and exchange rates. However, the recent Covid-19 outbreak dragged down telco share prices as well. Since Jan 27, the Kospi has dropped 17.2%, with shares of SK Telecom (SKT), KT, and LG U+ falling 18.1%, 17.0%, and 12.8%, respectively.
Amid uncertain economic conditions, interest in ‘cheap & safe’ stocks to rise
The question becomes: Will telco shares recover? Amid uncertain economic conditions, demand for ‘cheap & safe’ stocks is predicted to increase. When company earnings begin to evidence slowdown (expected during the 1Q20 earnings release season), telco earnings should be highlighted. We note that telco earnings are relatively insulated from Covid-19 effects, and that reduced marketing costs due to decreased sales activities should be reflected positively in short-term earnings. In addition, due to the recent share price decline, dividend yields stand above 5%. With all these factors considered, we view the recent share price plunge of telcos as excessive.
Due to a slump in new handset sales, 5G subscriber growth is likely slowing. However, we maintain a Positive rating on the telecom service industry, believing that expectations towards ARPU expansion and earnings improvement from 2Q20 (driven by an increasing portion of 5G subscribers) remain valid.
Recommend SKT as top pick, KT and LG U+ as short-term plays
We maintain SKT as our top pick for the telecom service industry. Backed by 5G subscriber growth, SKT should enjoy earnings improvement. In addition, SKT’s share price looks undervalued when considering the value of subsidiaries such as SK Hynix, SK Broadband, 11th Street, and ADT Caps.
In the short term, the announcement of business strategies by a new CEO at KT and solid supply-demand conditions for the shares of LG U+ should have favorable share-price effects at the two firms.