KT - KT Corp.: Too Early To Turn Bullish

2023-06-15 04:30:15 ET

Summary

• The shortlisting of potential CEO candidates for KT is expected to be completed in July, but there is the risk of a delay due to political pressures.
• It is also reasonable to be concerned about the potential changes to KT's dividend policy and corporate strategy under the charge of a new CEO.
• It will be premature to upgrade KT to a Buy, given that it is still uncertain who will be its new CEO, and when he or she can be appointed.

Elevator Pitch

I rate KT Corporation ( KT ) [030200:KS] stock as a Hold.

Previously, I wrote about KT's "regulatory headwinds and CEO succession" issues in my prior update published on April 3, 2023. Considering the recent developments relating to the search and appointment of a new CEO, I still don't think that this is the right time to be bullish on KT Corporation. As such, I retain my Hold rating for KT stock.

The Search For KT's New CEO

In my early-April article for KT, I quoted comments from the company's interim CEO in a media interview in March that "the new CEO search will require another couple of months."

In this section, I provide updates on KT Corporation's recent developments relating to the appointment of new board directors and a new CEO for the company.

KT was previously left with a single board director after a couple of directors stepped from the board in tandem with the former CEO Ku Hyeon-mo's departure, as revealed in a March 30, 2023 Korea JoongAng Daily news article . On May 8, 2023, KT Corporation disclosed that it has "initiated the process of appointing outside directors." KT subsequently issued a 6-K filing on June 9, 2023 revealing that an extraordinary general meeting or EGM will be held on June 30 allowing shareholders to elect the new directors.

In the 6-K filing dated June 9, 2023, KT indicated that "the BoD (Board of Directors) consisting of new outside directors (elected after the EGM) will promptly proceed the CEO selection process." This implies that the evaluation of potential CEO candidates will only begin after the EGM is conducted or from July onwards.

KT Corporation's disclosures in the 6-K filing issued on June 9 are consistent with the management's comments at the most recent quarterly earnings call. At its Q1 2023 earnings briefing earlier on May 11, KT guided that "the candidates for the new CEO will be finalized in July."

Uncertainty Regarding CEO Appointment And Future Corporate Policies

In my opinion, there are four key things that investors should pay special attention to regarding KT Corporation's CEO change.

Firstly, there is still no definite timeline for the official appointment of a new CEO. Assuming that everything goes to plan and the CEO candidates are shortlisted by July, there will still be time needed for assessing individual candidates and coming to a final decision. As such, the earliest time for KT Corporation's new CEO to come on board could be in the later part of Q3 2023.

Secondly, it is uncertain if political or regulatory factors might potentially push back the deadline for the appointment of KT's board directors or CEO. I noted in my earlier April 3 write-up that Korea's president and NPS (National Pension Service which is KT's biggest shareholder) had previously opposed to the reappointment of Ku Hyeon-mo as CEO. It appears that regulatory and political headwinds for KT aren't over yet despite the resignation of the former CEO. A May 16, 2023 Korea JoongAng Daily news report highlighted that "prosecutors raided KT headquarters office and related companies" last month "over alleged favoritism (involving KT's former CEO) in choosing a subcontractor for its subsidiary." Therefore, it is reasonable to be concerned that the planned appointment of new directors and a new CEO might not have the blessings of certain shareholder and the ruling government.

Thirdly, there remains the risk that the new CEO and the new board directors (assuming they are appointed successfully) could make unfavorable changes to KT Corporation's shareholder capital return policy. KT's CFO Young-Jin Kim noted at the first quarter results call that "there will be internal discussions to maintain the track record of our shareholder return policy." In my earlier January 17, 2023 article for KT, I specifically discussed about the potential catalysts relating to an increase in both KT Corporation's dividend payment frequency and dividend payout. There is no guarantee that the new leader in charge of KT and the new board members will be in favor of rewarding shareholders by returning a bigger portion of the company's excess capital.

Lastly, KT Corporation's strategic direction might potentially change under the leadership of a new CEO, and this could have either a positive or a negative impact on the company. As a holding company or conglomerate with multiple businesses (telecommunications and non-telecommunications), KT's shares can only command a higher valuation if the right capital allocation and corporate restructuring decisions are made. One way to create value is to spin-off and separate KT's individual non-telecommunications businesses to narrow the conglomerate discount for its shares. Another value-creation move involves selling off underperforming businesses within the group and allocating capital to those with better growth potential. In that respect, if the new CEO makes the wrong decisions and chooses the incorrect moves, KT's holding company valuation discount might widen.

Concluding Thoughts

On one hand, there is still a possibility of shareholders and politicians opposing KT's new CEO candidates. On the other hand, even if the new CEO is appointed successfully, there is no assurance that his or her policies will have a favorable impact on KT Corporation. Considering these factors, I choose to remain Neutral on KT stock, which translates into a Hold investment rating.

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