Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our
website www.macquarie.com.au/disclosures.
KOREA
032640 KS Outperform
Price (at 08:32, 31 Aug 2012 GMT) Won7,600
12-month target Won 9,500
Upside/Downside % 25.0
Valuation Won 9,500
- DCF
GICS sector
Telecommunication Services
Market cap Wonb
n
3,912
30-day avg turnover US$m 18.0
Market cap US$m 3,450
Number shares on issue m 514.8
Investment fundamentals
Year end 31 Dec 2011A 2012E 2013E 2014E
Revenue bn 9,256 10,787 11,341 11,731
EBIT bn 286 201 678 876
EBIT growth % -56.5 -29.7 237.5 29.3
Reported profit bn 85 32 432 628
Adjusted profit bn 85 32 432 628
EPS rep Won 196 74 1,000 1,451
EPS rep growth % -85.2 -62.3 1,252.7 45.2
EPS adj Won 196 74 1,000 1,451
EPS adj growth % -85.1 -62.3 1,255.3 45.2
PER rep x 38.8 102.9 7.6 5.2
PER adj x 38.8 103.0 7.6 5.2
Total DPS Won 150 20 300 440
Total div yield % 2.0 0.3 3.9 5.8
ROA % 2.9 1.8 5.7 6.9
ROE % 2.2 0.8 10.5 12.9
EV/EBITDA x 5.3 4.9 3.8 3.5
Net debt/equity % 97.0 105.3 86.9 67.1
P/BV x 1.0 1.0 0.9 0.7
032640 KS rel KOSPI performance, &
rec history
Note: Recommendation timeline - if not a continuous line, then there was no
Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, August 2012
(all figures in Won unless noted)
Analyst(s)
Macquarie Securities Korea Limited
Eugene Jung
+82 2 3705 8686 [email protected]
Macquarie Capital Securities (Japan) Limited
Nathan Ramler, CFA
+81 3 3512 7875 [email protected]
31 August 2012
LG U+
Welcome back, GROWTH!
Event
After our recent visit to the company, we have turned more confident on its
fundamental improvement as a result of rapid LTE migration and mobile
ARPU increase. Moreover, we welcome the company’s decision to cancel its
treasury shares, which significantly eliminates the overhang risk, and
therefore expect the share price to start reflecting the earnings turnaround
momentum.
Impact
Faster migration to LTE than expected - bigger upside on ARPU: LGU+
took the lead in the LTE transition race, outpacing competitors by far with over
30% as of August. Given the pace, we increase our LTE subs forecasts to
4.3m and 6.6m by end 2012/13, from 4.1m and 6.5m respectively. With the
revision, we become more bullish on the mobile ARPU turnaround, expecting
a 15%YoY and 10%YoY increase in mobile ARPU in FY12/13E respectively.
Heated marketing to continue, but is an inevitable investment: Although
we expect the competition intensity to ease in 2H12, we still expect it to
remain high as all three operators will aggressively compete over securing
more LTE subs. That said, we believe the company’s focus should be on
securing LTE subs as much as and as fast as possible in 2012 which will lead
to robust ARPU growth in 2013 when marketing costs are likely to ease.
Treasury share cancellation is a bold and smart move: This not only
significantly minimizes the overhang risk which has been putting downward
pressure on the share price, but also signals positive intentions by
management to focus on shareholder interests. Of note, the impact of
cancellation on our EPS forecast is limited, as we already excluded the
treasury shares from our calculation.
Increase in capex guidance is already reflected in our valuation: We
were not surprised by the increase in FY12E capex guidance from Won1.4tr
to Won1.6tr which was already reflected in our valuation, as we were
concerned about the company’s focus on improving its LTE network for the
new VoLTE service. Moreover, we remain conservative on FY13E capex as
well, and assume Won1.4tr vs. the company’s target of Won1.2tr.
Earnings and target price revision
We cut our FY12E EPS by 44%, reflecting the heated competition expected in
2H12, but increase our FY13E/14E EPS by 4%/6% as a result of the better
ARPU outlook. We increase our target price to Won9,500 from Won8,200.
Price catalyst
12-month price target: Won9,500 based on a DCF methodology.
Catalyst: Faster-than-expected LTE sub increase, easing marketing costs.
Action and recommendation
With the overhang risk out of the way, we expect the shares to start fully
reflecting the robust earnings turnaround from FY13E. We stand by our
conservative stance to FY12E results due to heated marketing competition,
but believe this is an inevitable investment to secure stronger ARPU growth
going forward. Outperform.
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