Integrating AI With Initiatives Like ixi-O Will Accelerate Revenue Growth And Enhance Competitiveness

Key Takeaways

• LG Uplus's strategic integration of AI aims to boost revenue across core businesses, including mobile, enterprise, and smart home services.
  
• Plans to enhance corporate value and shareholder returns focus on long-term growth, potentially improving earnings and net margins.
  
• Increased fixed and marketing costs, along with declining IPTV revenue, may pressure net margins despite enterprise growth and AI's focus on customer experience over monetization.

Catalysts

Provides various telecommunication services primarily in South Korea.

• LG Uplus has accelerated its digital transformation by integrating AI into its core businesses, improving customer experience and driving top-line revenue growth. This strategic focus on AI is expected to enhance revenue growth as AI-powered services become more widely adopted.
  
• The mobile business introduced the AI-powered ixi-O call agent, which offers value-added services like summaries and voice phishing alerts. As these services expand and integrate with third-party solutions, they can increase the company's subscriber base and revenue.
  
• The Enterprise Infrastructure segment experienced significant growth, with a focus on AI-centered strategies such as the All in AI initiative and the expansion of AX solutions for small merchants, which are expected to further boost revenue and support long-term growth.
  
• The Smart Home business is leveraging AI to enhance service quality and competitiveness through personalized IPTV services, potentially increasing customer retention and contributing to revenue growth.
  
• The company plans to disclose a corporate value-up plan with a focus on long-term growth and proactive shareholder return, potentially improving net margins and increasing earnings in the future.

LG Uplus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LG Uplus's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 4.1% in 3 years time.
• Analysts expect earnings to reach ₩654.1 billion (and earnings per share of ₩1515.73) by about January 2028, up from ₩533.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₩564.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, up from 8.3x today. This future PE is lower than the current PE for the KR Telecom industry at 18.8x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.73%, as per the Simply Wall St company report.

LG Uplus Future Earnings Per Share Growth

Risks

• LG Uplus' net profit declined by 13.9% year-on-year due to increasing fixed costs, such as labor and depreciation, which could indicate pressure on net margins.
  
• Despite growth in IDC and enterprise solutions revenue, the decline in IPTV revenue by 0.4% could signal challenges in maintaining service revenue across all segments.
  
• Marketing expenses have increased, albeit slightly by 0.5% year-on-year, which might continue to impact net margins if revenue growth does not keep pace.
  
• Although AI is central to LG Uplus’ strategy, the focus appears to be more on improving customer experience than immediate monetization, which could delay potential revenue enhancements.
  
• The company expects operating profit to bottom out this year, implying potential risks to short-term profitability and operating margins if cost-control measures are insufficient.

Valuation

• The analysts have a consensus price target of ₩12182.61 for LG Uplus based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩19000.0, and the most bearish reporting a price target of just ₩8300.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩15898.1 billion, earnings will come to ₩654.1 billion, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 6.7%.
• Given the current share price of ₩10330.0, the analyst's price target of ₩12182.61 is 15.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.