KT - KT Corporation: A Bright Future Lies Ahead

Summary

• Sell-side analysts in general have a positive opinion of KT Corporation based on a review of consensus target prices, financial projections, and investment ratings.
• KT Corporation's shares can command a higher valuation if the company pays out dividends more frequently and raises its dividend payout ratio.
• KT is well-positioned to capitalize on growth opportunities relating to digital transformation in South Korea as evidenced by recent metrics.
• I maintain a Buy rating for KT Corporation, as I think that a bright future lies ahead for KT taking into account these multiple factors.

Elevator Pitch

My Buy rating for KT Corporation's ( KT ) [030200:KS] stays unchanged.

I wrote about KT's "multiple tailwinds" relating to its telecommunications and non-telecommunications businesses in my prior update for the stock published on November 7, 2022.

With this current article, my focus is on the sell-side analysts' expectations for KT, potential changes to its future dividend payouts, and the growth opportunities associated with digital transformation. My research suggests that the sell-side has a positive opinion regarding KT, and the stock has potential catalysts relating to dividend policy changes. More importantly, digital transformation is a key structural growth driver for KT in the mid-to-long term. I retain my Buy rating for KT, as I think that its future is bright after considering the above-mentioned.

Analysts Have A Favorable View Of KT

Stocks tend to perform well when they are viewed favorably by the market. Therefore, it is critical to assess how the sell-side analysts think about KT Corporation, as this will have a major influence on KT's share price performance in the near term.

I consider the sell-side consensus financial forecasts, analyst ratings and price targets in evaluating analyst sentiment for KT Corporation. Note that these metrics are sourced from S&P Capital IQ , and they take into account the foreign sell-side analysts' coverage of KT's Korea-listed shares.

Analysts see KT Corporation reversing from a -11.5% contraction in normalized net profit for fiscal 2022 to generate a positive bottom line expansion of +9.8% for FY 2023. Also, the sell-side consensus FY 2023 bottom line estimate for KT has been raised by approximately +8% in the past year. In a nutshell, the market expects KT Corporation's financial performance in the current year to be better than that for 2022.

Separately, more analysts are having either Strong Buy or Buy ratings assigned to KT Corporation's stock. At the end of the first quarter of 2022, 12 analysts rated KT as a Strong Buy, while 8 analysts awarded a Buy rating to KT. As of January 16, 2023, there are 14 analysts and 9 analysts who view KT's shares as a Strong Buy and Buy, respectively. Between March 31, 2022, and January 16, 2023, the mean target price for KT Corporation also increased by roughly +15%.

Analyst sentiment for KT is pretty favorable judging by the metrics presented in this section.

Potential Catalysts Relating To Future Dividends

KT Corporation's shares could rise significantly if the company makes positive changes to its dividend payout ratio and dividend payment frequency. I view these potential changes to KT's future dividends as the key catalysts for the stock.

KT's current policy is to distribute half of the company's normalized net income as dividends, and there is room for KT Corporation to increase its dividend payout ratio to more than 50% in the future. Notably, KT Corporation emphasized at its most recent Q3 2022 earnings call that it "can actually grow the size of the dividend payout" taking into account "our revenue growth and our cost efficiency efforts." This is one key catalyst for KT.

The other key catalyst for KT Corporation is the increase in dividend payment frequency.

KT currently distributes dividends to its shareholders once a year. In comparison, KT Corporation's peer, SK Telecom Co., Ltd ( SKM ) [017670:KS], has a policy of paying out dividends on a quarterly basis. As such, KT Corporation is less attractive than SK Telecom in the eyes of income-focused investors who will prefer a higher frequency of dividend distributions. This might also explain why KT Corporation (3.22 times) trades at a lower consensus forward next twelve months' EV/EBITDA multiple as compared to SK Telecom (3.74 times) as per S&P Capital IQ data.

In summary, KT Corporation has the potential to become a more appealing dividend play by improving its dividend payout ratio and increasing its dividend payment frequency.

Growth Opportunities Relating To Digital Transformation

Research published by research firm AlphaBeta in September 2021 highlighted that "digital transformation can unlock KRW281 trillion worth of annual economic value in South Korea by 2030." This offers an indication of the substantial growth opportunities associated with digital transformation that KT can capitalize on.

KT Corporation has disclosed certain metrics in its Q3 2022 results presentation and earnings briefing which suggest that the company is a beneficiary of digital transformation business opportunities.

In the third quarter of last year, KT's revenue derived from its telco B2B and enterprise DX (Digital Transformation) businesses expanded by +9.5% YoY and +8.3%, respectively. For the first nine months of 2022, KT Corporation's business-to-business or B2B segment saw the value of its orderbook grow by +21% YoY to KRW2.97 trillion. KT attributed this strong growth for the B2B segment's orders to "demand for digital transformation" at its most recent quarterly results call.

It is reasonable to assume that a significant number of Korean companies will consider leveraging digital transformation to generate structural cost savings in a challenging economic environment. Therefore, KT Corporation's revenue relating to digital transformation is likely to continue growing strongly in the future.

Concluding Thoughts

I don't see any reasons to change my bullish views and Buy rating for KT Corporation. Digital transformation opportunities can help to drive a faster pace of growth for KT in the intermediate to long term; while KT can become a more attractive dividend stock in the future if it makes the relevant changes to its dividend payout ratio and payment frequency.

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