􀀗 Merger to shift LG focus from market
share to margin – positive for KT/SKT
􀀗 Cautious on LG cost synergy targets
􀀗 Downgrade LG Dacom to N(V) from
OW(V); reiterate OW on KT (an Asia
Super Ten idea) and SKT
LG telco merger to reduce competition levels. LG telcos
have typically been the most aggressive on pricing, but we
expect a shift in emphasis of the merged entity from market
share to margin. The merger should complete by January
2010: we see it as positive for KT and SKT.
Cautious on stated merger benefits. Fixed mobile
convergent services have yet to make any impact, anywhere.
Integration of LG telecom group services and platforms is
already substantially in place – we see limited additional
benefits from the merger. On cost synergies, LG telcos are
already relatively lean: this means much depends on the
reduction in marketing costs as a result of bundling. Existing
price leadership means additional bundling discounts will
put considerable pressure on margins. We calculate 4% EPS
dilution for LGT on management guidance of 0.8% cost
savings in 2010. This is before extra discounts: our scenario
analysis illustrates high sensitivity to revenues.
Downgrade LG Dacom to Neutral (V); other ratings
unchanged. We downgrade LG Dacom on expectations of
slower growth in 2010, with competition from an improved
VoIP capability at KT. We trim our 2009 OP estimate for
KT by 2% but remain OW with a target of KRW54,000.