Subscriber Growth and 5G Effects Drive Revenue Expansion
The author is an analyst of NH Investment & Securities. He can be reached at jaemin.ahn@nhqv.com. -- Ed.
Thanks to a subscriber uptick and 5G effects, LG U+ is enjoying wireless revenue growth and earnings improvement. As revenue growth typically drives earnings expansion in the telecom sector, we are upbeat towards the prospect of LG U+ seeing ongoing earnings improvement in 2020.
Subscriber growth and 5G effects drive wireless revenue expansion
Adhering to a Buy rating on LG U+, we raise our TP from W14,500 to W18,000. We draw attention to the firm’s notable rise in wireless revenue on the back of overall subscriber growth and an increasing 5G subscriber portion. Of note, LG U+ posted solid 1Q20 earnings despite sluggish ARPU relative to competitors. Should its ARPU turn around, we expect the company to enjoy even stronger revenue acceleration.
LG U+ is forecast to post sound 2020 earnings, with service revenue of W9.96tn (+8.1% y-y), wireless revenue of W5.88tn (+6.6% y-y), and OP of W864.1bn.
With the acquisition of LG HelloVision having wrapped up, LG HelloVision’s earnings began to be incorporated into LG U+’s consolidated earnings in 1Q20. Going forward, LG U+ should enjoy further earnings improvement stemming from anticipated synergies with LG HelloVision, driven by an expanding lineup of bundled services and the sharing of sales and telecommunications networks.
We note that LG Corp has decided to acquire an additional 8.53mn shares (W90bn) of LG U+, bringing up its stake from 36.05% to 38.0%. We estimate that LG Corp had bought about 5mn LG U+ shares as of May 8, a situation indicating that favorable supply-demand dynamics for LG U+ shares will sustain in the near term.
1Q20 results: Largely beats consensus
LG U+ posted 1Q20 sales of W3.29tn (+8.8% y-y, +12.6% y-y) and OP of W219.8bn (+12.9% y-y, +17.4% q-q), with OP easily surpassing both our estimate of W180.1bn and the consensus of W187.4bn, mainly thanks to wireless revenue growth stemming from 5G subscriber expansion.
Helped by stabilizing market competition after 3Q19, the company’s 1Q20 marketing expense declined q-q to W565bn (+10.3% y-y, -3.1% q-q).