KT Earnings: Strong Growth at an Attractive Valuation

We retain our fair value estimate for KT 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.

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. While we see some possibility of this increasing in future years if it can continue to grow earnings and cash flow near current rates, aggressive investment plans in artificial intelligence may soak up some of its strong cash flow. 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.