SEOUL, KOREA - ▶ 1Q13 earnings were similar to our expectations. Service sales (excluding handset sales) grew 1.2% QoQ, in line with our estimate, and OP of W367.3bn topped our estimate of W349.5bn by 5.1%. Real estate revenue and wireless revenue increased 114.6% and 3.1%, respectively, while fixed-line revenue fell 1.8%.
▶ We expect LTE growth, reduced marketing cost and solid earnings at subsidiaries from 2Q13. LTE subscribers grew rapidly from 3.9mn (23.6% of total mobile subscribers) in Dec 2012 to 5.07mn (30.8%) in Mar 2013. As such, ARPU grew 1.4% QoQ and 8.3% YoY. ARPU should grow another 8.0% as LTE subscribers reach 8.6mn in Dec 2013.
▶ LTE subscriber market share of 25.9% is lower than the total mobile subscriber market share of 30.5%. KT should ease on marketing once LTE market share reaches 30.5%. Unlimited intra- and inter-carrier voice call plans should also accelerate the decline in fixed-line sales.
▶ We maintain BUY and a TP of W48,000. Our TP is equivalent to 9.6x 12MF PE, a 5.0% discount to the three-year trailing average. We base our recommendation on: 1) attractive valuations (7.8x 12MF PE) and dividend merit (5.2% yield).
2) KT’s LTE competitiveness will grow in 2013, which should eventually improve OP by a 19.2% CAGR over the next two years. 3) Growth at non-telecom businesses (media, rental) should contribute more to earnings. 4) KT’s dividend payment capability should firm due to the sale of idle assets (real estate, copper cable).
