Investing.com -- UBS initiated coverage of South Korea's telecom sector with a positive outlook, driven by strong earnings growth and expansion into AI, data centers, and cloud services. The brokerage sees the sector undervalued, trading at a 60% discount to Japanese peers despite higher operating profit growth and dividend yields.

UBS forecasts a 10% compound annual growth rate in operating profit from 2024-2026, the strongest momentum since 2015. Traditional telecom businesses remain stable, while AI-related ventures are expected to drive 18% revenue growth.

The brokerage shrugged off policy concerns tied to South Korea’s upcoming elections, stating that past Democratic pledges did not pose major risks to telecom firms. It also expects telcos to benefit from the repeal of the Mobile Device Distribution Improvement Act, with no major impact on consumer behavior or marketing strategies.

UBS prefers KT (NYSE:KT), rated Buy for its strong growth in data centers and cloud, followed by SK Telecom (NYSE:SKM) also rated Buy for its steady operating profit expansion. LG Uplus (KS:032640), was rated Neutral due to weaker return on equity and less clarity in its AI business.

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