Top Picks: SK Telecom, KT
The author is an analyst of NH Investment & Securities. He can be reached at jaemin.ahn@nhqv.com. -- Ed.
- In 1Q21, telcos’ earnings surpassed market projections by a wide margin. Wireless revenues jumped thanks to faster-than-expected growth in 5G penetration. In addition, marketing expenses remained stable in line with subsiding market competition, with 5G investment also entering an easing period, in turn leading to OP expansion.
- Having been neglected during the 2H20 stock market recovery, sector shares still look undervalued despite solid earnings improvement. Expecting telcos to experience a period reminiscent of the 4G LE-driven earnings and share price expansion witnessed over 2012~2013, we believe that telcos deserve strong investor attention in 2H21.
- We also favorably view the fact that industry players are actively investing in non-telecom businesses in order to secure mid/long-term earnings growth drivers. Of note, SKT is planning a spin-off to greater highlight the value of its non-telecom businesses.
- Maintaining a Positive rating towards the telecom service industry, we present SKT and KT as our 2H21 sector top picks. We anticipate the planned spin-off to lead to EV expansion at SKT. As for KT, we positively view its aggressive investment in non-telecom businesses and increasing wireless business earnings.
Top pick 1: SKT (017670.KS); TP of W400,000
SKT’s planned spin-off in 2H21 will likely lead to EV expansion. The event is to divide SKT into: 1) a company dedicated to the telecom business (which promises stable cash flow and dividends); and 2) a holding company focused upon ICT-related investment. We believe that this reorganization will provide opportunities for the value of SKT’s currently-undervalued subsidiaries to be properly appreciated.
We size SKT’s post-spin-off EV at W28.5tn—W14.4tn for the value of SKT’s telecom business and W14.1tn for that of SKT Holdings (50% discount applied to NAV).
As Korea’s number-one wireless player, SKT appears better positioned than its smaller rivals to benefit from expanding wireless sales amid ongoing 5G subscriber growth.
Of note, offering a DPS of W10,000, SKT has pledged to dole out quarterly dividends starting from this year, and to maintain lofty dividends for the remaining entity (telecom business) even after the planned spin-off.
Top pick 2: KT(030200.KS); TP of W42,000
KT’s recent changes have been impressive in terms of speed and strategic direction, and in our view, this is the result of the strategic stance adopted by new CEO Koo Hyun-mo, who was inaugurated in 2020. KT is now looking for new growth drivers in non-telecom businesses such as content, fintech, and B2B, and we believe such efforts will enable the firm to regain its lost competitiveness and EV.
Wireless service revenue and OP have been on a rise thanks to higher 5G penetration. Meanwhile, marketing expenses are declining and capex burden is decreasing.
Also boding well for its future earnings is KT’s non-telecom business expansion, including the content business (led by Studio Genie), fintech business (K-Bank and BC Card), and B2B business (AI, big data, and cloud services).