LG Uplus Earnings: Increased Depreciation and Spectrum Costs Hit Profit; FVE to KRW 9,700

The LG Uplus' second-quarter result was broadly in line with our expectations for revenue, but operating profit was below our expectations, mainly driven by large increases in depreciation and amortization expenses. We reduce our operating profit forecasts around 20% in 2024, with the impact reducing in the outer-year forecasts, mainly due to increased depreciation and interest expenses. Our fair value estimate for LG Uplus reduces to KRW 9,700 from KRW11,400, leaving the stock on a 3-star rating. At our fair value estimate, the stock would trade on a 2024 price/earnings of only 7.4 times, with a 6.7% dividend yield. We see this as reasonable given our forecast for the company to grow its revenue by an average of 2.6% per year and its operating income by an average of 1.3% per year over the next five years. Our no-moat rating is retained given that LG Uplus has generated returns averaging below cost of capital over the past 10 years and we expect this to continue over our five-year explicit forecast period. LG Uplus has gradually taken market share in mobile, broadband, and pay-TV markets but remains in third position in terms of market share, with 20%-25% in each market. Given the high fixed cost nature of telecommunications, this puts LG Uplus at a slight disadvantage compared with its peers, KT Corp and SK Telecom, who've benefited from first-mover advantage but who also have no-moat ratings.