Company Reports

We retain our fair value estimate for KT of USD 19.20 per ADR following a second-quarter 2024 result that was broadly in line with our estimates on an underlying basis. Second-quarter revenue was flat with reported operating income decreasing by 14.3%, which was hit by a wage bargaining agreement that was reached in the second quarter of 2024 as opposed to the third quarter in 2023. After adjusting for this, underlying operating profit would have declined by 3.1%. The result was hit by the performance of KT’s subsidiary businesses, whose operating profit contribution fell by 20% led by BC Card and the content subsidiaries, which were hit by the economic downturn. The core KT telecom business reported a sold underlying operating profit increase of 3.9%. Our forecasts incorporate consolidated operating earnings declining at around 1.6% per year on average over the next five years, but despite this the stock trades at a price/fair value ratio of around 0.73 times and we believe it is undervalued. At the current price, KT trades on a price/earnings ratio of 8.7 times and a dividend yield of 3.3%, which we believe is attractive compared with many international telecom service companies trading at midteen P/E multiples.

South Korea has traditionally displayed many of the factors we like in a telecommunications market. On the wireless side, there are only three national operators with their own networks, and they have behaved rationally, particularly over the past four years. On the fixed-line side, competition has been restrained, as there are no major cable operators. However, the regulator can be inconsistent and is too involved in decisions that we think should be left to the market, and the operators have on occasion behaved less rationally. KT is the incumbent fixed-line telecom operator in Korea. The firm is also the largest broadband provider and second-largest wireless telecommunications operator. It has a growing television business and is entering into other businesses, including cloud computing and payment processing.

South Korea has traditionally displayed many of the factors we like in a telecommunications market. On the wireless side, there are only three national operators with their own networks, and they have behaved rationally, particularly over the past three to four years. On the fixed-line side, competition has been restrained, as there are no major cable operators. However, the regulator can be inconsistent and is too involved in decisions that we think should be left to the market, and the operators have on occasion behaved less rationally. KT is the incumbent fixed-line telecom operator in Korea. The firm is also the largest broadband provider and second-largest wireless telecommunications operator. It has a growing television business and is entering into other businesses, including cloud computing and payment processing.

We increase our fair value estimate for KT to USD 19.20 per ADR from USD 18 previously, following a first-quarter 2024 result that was slightly ahead of our estimates on an underlying basis. First-quarter revenue increased by 3.3% year on year and reported operating income increased by 4.2% year on year. This was supported by solid growth from the core telecom businesses with wireless revenue up 1.7%, broadband up 2.1%, and media up 2.3%, all year on year. KT initiated quarterly dividends of KRW 500, announced with the first-quarter result. Our forecasts incorporate consolidated operating earnings declining at around 1% per year on average over the next 5 year, but despite this the stock trades at a price/fair value of around 0.7 times and we believe it is undervalued. We think that the stronger revenue and earnings growth may provide catalysts for share price improvement. At the current price, KT trades on a P/E ratio of 8.7 times and a dividend yield of 5.8%, which we believe is attractive compared with many international telecom services companies trading at midteen P/E multiples.

We increase our fair value estimate for KT to USD 18 per ADR following its third-quarter 2023 result, which was in line with our estimates on an underlying basis, despite the poor headline profit. Third-quarter service revenue increased by 3.7% year on year with reported operating income declining by 29% year on year. However, this decline in operating income was largely due to wage negotiations concluded earlier in 2023 than 2022, resulting in around KRW 140 billion of costs that were included in fourth-quarter 2022 also being included in third-quarter 2023. There were also approximately KRW 50 billion of "content smoothing costs" included this quarter. These should normalize in the fourth quarter and excluding the impact of these, third-quarter operating profit would have increased by around 13.1%, despite KT being hit by the same rising energy costs that caused competitor LG U+ to report a decline in operating profit.

South Korea has traditionally displayed many of the factors we like in a telecommunications market. On the wireless side, there are only three national operators with their own networks, and they have behaved rationally, particularly over the past three to four years. On the fixed-line side, competition has been restrained, as there are no major cable operators. However, the regulator can be inconsistent and is too involved in decisions that we think should be left to the market, and the operators have on occasion behaved less rationally. KT is the incumbent fixed-line telecom operator in Korea. The firm is also the largest broadband provider and second-largest wireless telecommunications operator. It has a growing television business and is entering into other businesses, including cloud computing and payment processing.

We downgrade KT Corp’s moat rating from narrow to none and reduce our fair value estimate for KT Corp to USD 17.20 per ADR from USD 18.00 per ADR due to the moat rating downgrade and a slightly weaker KRW. The moat downgrade is based on KT’s inability to earn above cost of capital returns consistently over the past 10 years, and therefore our uncertainty around its ability to do so over the next 10years. This is largely due to the competitive nature of the Korean telecom market and the penchant of KT for investing in noncore telecom activities, such as content and payment services, that we see as having no moat. Despite the moat and fair value downgrades, we continue to see KT Corp as decent value, trading on a 2024 price/earnings ratio of only 8 times with a 6% dividend yield.

South Korea has traditionally displayed many of the factors we like in a telecommunications market. On the wireless side, there are only three national operators with their own networks, and they have behaved rationally, particularly over the past three to four years. On the fixed-line side, competition has been restrained, as there are no major cable operators. However, the regulator can be inconsistent and is too involved in decisions that we think should be left to the market, and the operators have on occasion behaved less rationally. KT is the incumbent fixed-line telecom operator in Korea. The firm is also the largest broadband provider and second-largest wireless telecommunications operator. It has a growing television business and is entering into other businesses, including cloud computing and payment processing.

We retain our fair value estimate for KT at USD 18 per ADR following a slightly better-than-expected second-quarter 2023 result. Second-quarter revenue increased by 3.7% with operating income up 26% and net profit up 19%, all year on year. Revenue from the large, core telco business-to-consumer business grew at 0.8% year on year in the second quarter, in line with the growth from the largest business line in wireless. The telco business-to-business business also grew revenue at 3.8% year on year in the second quarter with Digico B2B growth up 5.2% year on year. Subsidiaries such as KT Estate, BC Card, and kt cloud also provided strong growth. Our slightly revised forecasts incorporate consolidated operating earnings growing at only around 3.4% per year over the next five years, but despite this, the stock trades at a price/fair value of around 0.69 times and we believe it is undervalued. We believe that the stronger revenue and earnings growth may provide catalysts for share price improvement.

South Korea has traditionally displayed many of the factors we like in a telecommunications market. On the wireless side, there are only three national operators with their own networks, and they have behaved rationally, particularly over the past three to four years. On the fixed-line side, competition has been restrained, as there are no major cable operators. However, the regulator can be inconsistent and is too involved in decisions that we think should be left to the market, and the operators have on occasion behaved less rationally. KT is the incumbent fixed-line telecom operator in Korea. The firm is also the largest broadband provider and second-largest wireless telecommunications operator. It has a growing television business and is entering into other businesses, including cloud computing and payment processing.

We reduce our fair value estimate for KT Corp to USD 18.00 per ADR from USD 19.30 per ADR previously based on a slightly weaker-than-expected first-quarter 2023 result, a weaker Korean won, and an increase in KT’s net debt by KRW 2.2 trillion over the past 12 months to a level of KRW 8.5 trillion. First-quarter revenue declined 2.6% year on year with operating income down 22% and net profit down 32%. Note that the previous period included one-off profits from the sale of Mapo Solution Centre worth KRW 74.6 billion, with another KRW 50 billion adjustment for accounting treatment of handset receivables. Excluding these two items, operating profit would only have declined by around 3%. Revenue from the large, core telco business-to-consumer business grew at 1.2% year on year in the first quarter, with the largest business line in wireless growing by 1.1%. The telco B2B business also grew revenue at 4.1% year on year in the first quarter. Subsidiaries such as BC Card and Skylife also provided strong growth. Our revised forecasts incorporate consolidated operating earnings growing at only around 2.8% per year over the next five years, but despite this, the stock trades at a price/fair value of around 0.65 times and we think it is undervalued. We believe that the stronger revenue and earnings growth may provide catalysts for share price improvement.

South Korea has traditionally displayed many of the factors we like in a telecommunications market. On the wireless side, there are only three national operators with their own networks, and they have behaved rationally, particularly over the past three to four years. On the fixed-line side, competition has been restrained, as there are no major cable operators. However, the regulator can be inconsistent and is too involved in decisions that we think should be left to the market, and the operators have on occasion behaved less rationally. KT is the incumbent fixed-line telecom operator in Korea. The firm is also the largest broadband provider and second-largest wireless telecommunications operator. It has a growing television business and is entering into other businesses, including cloud computing and payment processing.

We reduce our fair value estimate for KT to USD 19.30 per ADR from USD 19.70 per ADR based on a weaker Korean won partially offset by slightly increased earnings forecasts on the back of a strong third-quarter 2022 result. Third-quarter revenue growth of 4.2% year on year drove operating profit growth of 18.4%. Revenue from the large, core telco B2C business grew at 0.6% year on year, with higher growth generated from the telco B2B business of 9.5% year on year and major subsidiaries such as Skylife, Content, and kt cloud all growing at double-digit rates. Our forecasts incorporate consolidated operating earnings growing at only around 1% per year for the four years following 2022 which we think is conservative. Despite this, the stock trades at a price/fair value of around 0.7 times and we think it is undervalued. We believe that the stronger revenue and earnings growth may provide catalysts for share price improvement. At our fair value estimate, KT would trade on a P/E ratio of 8.5 times and a dividend yield of 5.7%, which we believe is attractive compared with many international telecom services companies trading at low-teens multiples. KT’s dividend payout ratio is only 50% for 2022, but we see some possibility of this increasing in future years if it can continue to grow earnings and cash flow near current rates. We also retain our narrow moat rating based on efficient scale with the incumbent mobile operators having many advantages over any credible potential new entrants considering joining the market.

South Korea has traditionally displayed many of the factors we like in a telecommunications market. On the wireless side, there are only three national operators with their own networks, and they have behaved rationally. On the fixed-line side, competition has been restrained, as there are no major cable operators. However, the regulator can be inconsistent and is too involved in decisions that we think should be left to the market, and the operators have on occasion behaved less rationally. KT is the incumbent fixed-line telecom operator in Korea. The firm is also the largest broadband provider and second-largest wireless telecommunications operator. It has a growing television business and is entering into other businesses, including cloud computing and payment processing.

South Korea has traditionally displayed many of the factors we like in a telecommunications market. On the wireless side, there are only three national operators with their own networks, and they have behaved rationally. On the fixed-line side, competition has been restrained, as there are no major cable operators. However, the regulator can be inconsistent and is too involved in decisions that we think should be left to the market, and the operators have on occasion behaved less rationally. KT is the incumbent fixed-line telecom operator in Korea. The firm is also the largest broadband provider and second-largest wireless telecommunications operator. It has a growing television business and is entering into other businesses, including cloud computing and payment processing.

We reduce our fair value estimate for KT to USD 19.70 per ADR from USD 20.40 per ADR previously based on a weaker Korean won. We retain our existing forecasts following a second-quarter 2022 result broadly in line with expectations. Second-quarter services revenue growth of 6.3% year on year, was offset by 7.1% expense growth with labour expense growth of 9.3% and cost of service growth of 8.1% the main sources of cost increase. The core telco business-to-consumer business grew revenue at 1.6% year on year with higher growth recorded from the telco business-to-business, or B2B, business of 6.8% and the Digico B2B service of 11.4% driven by 11.4% growth in cloud/IDC, 12.9% growth in enterprise/DX and 48% growth in articial intelligence/new business. Our forecasts incorporate consolidated operating earnings broadly flat for the next four years following 2022 which we think is conservative, but despite this, the stock trades at a price/fair value estimate of around 0.75 times and we think it is undervalued. We believe that the stronger revenue and earnings growth may provide catalysts for share price improvement. At our fair value estimate, KT would trade on a 2022 P/E ratio of 9.3 times and a dividend yield of 5.2%. We also retain our narrow moat rating based on efficient scale with the incumbent mobile operators having many advantages over any credible potential new entrants considering joining the market.

We maintain our fair value estimate for KT Corp at USD 20.40 per ADR following a strong first-quarter 2022 result. First-quarter services revenue growth of 6.4% year on year, along with strong cost control drove operating profit growth of 30% year on year. The core telco B2C business grew revenue at 1.2% year on year with higher growth recorded from other smaller products such as corporate telephony (14%), cloud and IDC (15%), real estate (16%), and new businesses such as blockchain, artificial intelligence, or AI, call centers, and energy which grew at 41%. Our forecasts incorporate consolidated operating earnings broadly flat for the next four years following 2022 which we think is conservative but despite this, the stock trades at a price/fair value estimate of around 0.67 times and we think it is undervalued. We believe that the stronger revenue and earnings growth may provide catalysts for share price improvement. At our fair value, KT would trade on a price/earnings ratio of 11.3 times and a dividend yield of 3.5%. We also retain our narrow moat rating based on efficient scale with the incumbent mobile operators having many advantages over any credible potential new entrants considering joining the market.

We increase our fair value estimate for KT Corp to USD 20.40 per ADR from USD 20.20 per ADR as a result of increased forecasts for both core and noncore businesses, following its 2021 result. Full-year revenue growth of 4.1%, along with strong cost control drove operating profit growth of 41%. Management expects the growth to continue in 2022 guiding for over 4% growth to KRW 26 trillion driven by 3.2% growth in service revenue from the core telecom business topped up by higher growth from newer businesses such as cloud and IDC. These businesses are driving revenue growth for telcos across the region as corporates and governments look to move more of their business process into the cloud. Our forecasts incorporate consolidated operating earnings broadly flat the next four years following 2021, which we think is conservative; but despite this, the stock trades at a price to fair value of around 0.63 times and we think it’s undervalued. We believe that the dividend growth and stronger revenue growth may provide catalysts for share price improvement. At our fair value, KT would trade on a price/earnings ratio of 13.1 times and a dividend yield of 3.8%. We also retain our narrow moat rating based on efficient scale with the incumbent mobile operators having many advantages over any credible potential new entrants considering joining the market.

South Korea has traditionally displayed many of the factors we like in a telecommunications market. On the wireless side, there are only three national operators with their own networks, and they have behaved rationally. On the fixed-line side, competition has been restrained, as there are no major cable operators. However, the regulator can be inconsistent and is too involved in decisions that we think should be left to the market, and the operators have on occasion behaved less rationally. KT is the incumbent fixed-line telecom operator in Korea. The firm is also the largest broadband provider and second-largest wireless telecommunications operator. It has a growing television business and is entering into other businesses, including cloud computing and payment processing.

We increase our fair value estimate for KT Corporation to USD 20.20 per ADR from USD 18.90 per ADR as a result of increased forecasts for core and noncore businesses, more than offsetting a weaker South Korean won, following its third-quarter result. KT reported another very strong result with third-quarter service revenue up 3.1%, EBITDA up 6.5% and operating income up 30%. The operating income growth was due to 24.3% growth in the core business operating income, driven by the revenue increase and reduced selling expenses. As we have seen in other markets IDC/cloud revenue growth was also very strong, growing 29.7%. Our forecasts incorporate consolidated operating earnings broadly flat over the next four years following 2021, which we think is conservative but despite this the stock trades at a price to fair value of around 0.63 times and we think it’s undervalued. We believe dividend growth and stronger revenue growth may provide catalysts for share price improvement. At our fair value, KT would trade on a price/earnings ratio of 13.1 times and dividend yield of 3.8%. We also retain our narrow moat rating based on efficient scale with the incumbent mobile operators having many advantages over any credible potential new entrants considering joining the market.