KT Earnings: Generating Strong Growth From B2B and Subsidiaries; Fair Value Down to to USD 18

We reduce our fair value estimate for KT Corp KT 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.

At the current price, KT trades on a price/earnings ratio of 8 times and a dividend yield of 6.4%, which we believe is attractive compared with many international telecom services companies trading at midteens price/earnings multiples. We forecast a dividend payout ratio of only 50% for 2023, 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.