Analyst Note| Dan Baker |
KT reported a very strong second-quarter result, with service revenue up 2.7% and operating income up 38.5% year over year. Operating income growth was due to the 38.1% growth in the core business, with reduced handset subsidies the biggest contributor. The noncore affiliates businesses also showed strong profit growth of 40% year over year, driven by BC Card, Nasmedia and PayD. We increase our fair value estimate to USD 18.90 per ADR from USD 16.15 per ADR as a result of increased forecasts for both core and noncore businesses. Our forecasts incorporate consolidated operating earnings being broadly flat over the next five years--which we think is conservative--but despite this, the stock trades at a price to fair value of around 0.65 times and we think it’s undervalued. 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 13.4 times and a dividend yield of 3.7%. 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.