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KT Corp Reports Strong Profit Growth From Handset Subsidy Reduction

Dan Baker Senior Equity Analyst

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.

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Company Profile

Business Description

KT is South Korea's largest fixed-line telecom operator, with around 15 million customers. It is the largest broadband firm in the country, with 9.1 million customers, and the second- largest wireless operator with 22.3 million subscribers; the company also has 8.7 million pay-television customers. Additionally, it has about 30 nontelecom businesses. These nontelecom businesses, IPTV and wireless data are the focus of its growth strategy.

KT Gwanghwamun Building East, 33, Jong-ro 3-Gil, Jongno-gu
Seoul, 03155, Korea, Republic of
T +82 317270114
Sector Communication Services
Industry Telecom Services
Most Recent Earnings Jun 30, 2021
Fiscal Year End Dec 31, 2020
Stock Type
Employees 22,720