The author is an analyst of KB Securities. He can be reached at joonsop.analyst@kbfg.com. — Ed.
Maintain BUY but lower target price
We maintain BUY but cut our TP to KRW16,500 from KRW17,500 for LGU to reflect a change in COE (8.45%→9.12%). Our investment points include improved B2B earnings visibility and positives coming from the stabilizing wireless B2C market. We expect these factors will be reflected in 4Q22 results, acting as a catalyst for the stock.
4Q22 preview: OP at KRW267.1bn; above market consensus
We forecast 4Q22 revenue at KRW3.67tn (+1.7% YoY) and OP at KRW267.1bn (+68.8% YoY), which are both above the market consensus (KRW3.64tn revenue; KRW230.6bn OP). Wireless B2C market stabilization should sharply reduce marketing expense. Also, we expect an increase in B2B earnings with the reflection of delayed Enterprise Infrastructure orders in 3Q22 and Solution/IDC business expansion.
Decrease in marketing expense to boost Wireless earnings
A decrease in new subscribers in 4Q22 due to issues such as an iPhone supply shortage appears to have lowered marketing expense (spending on subsidies). We expect 4Q22 marketing expense of KRW575bn (-5.1% YoY). Based on our estimates, we find significance in revenue improvement amid a drop in marketing expense; overall no. of subscribers rose alongside a record-low subscriber churn rate of 1.0% in 3Q22. The supply shortage of new flagship smartphones and the family/friends bundled discount plan U+ Together (launched in 2021) appear to have reduced subscriber attrition.
Solution earnings (e.g., intelligent transportation system) to improve
We expect robust 4Q22 Enterprise Infrastructure earnings driven by Solution (e.g., intelligent transportation system, cloud infrastructure). The ITS project in Gangneung (KRW45bn) was carried out until November (Dong-A Ilbo; Oct 17). Also, sales for cloud management solution U+Cloud Multi-Connect are growing rapidly (AI Times, Jan 11).
