KT Generating Strong Growth From B2B and Subsidiaries; FVE Decreased to USD 19.30

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.