KT - KT Corporation: Consider Both Positives And Negatives

2023-08-28 04:32:51 ET

Summary

• KT's positives are that a new CEO is expected to be formally appointed soon and the company did a good job managing costs in Q2.
• The key negatives relating to KT are that the company's future earnings and dividends could potentially miss expectations.
• I have a Neutral view of KT Corporation stock as an investment candidate, considering both positives and negatives relating to the stock.

Elevator Pitch

My Hold investment rating for KT Corporation ( KT ) [030200:KS] shares remains as a Hold. With my earlier June 15, 2023 article , I previously wrote about the "uncertainty regarding (the new) CEO appointment" for KT.

I outline the main positives and negatives associated with KT Corporation in this current update, taking into account recent developments. KT Corporation's shares shouldn't be rated as a Buy, as the outlook for the company's future earnings and dividends is murky. However, a Sell rating for KT isn't appropriate, as the company is coming close to having a new permanent CEO, and it has demonstrated excellent cost discipline in the recent quarter. Therefore, my Hold rating for KT stays intact.

The Key Positives For KT

In my view, KT Corporation boasts two key positives.

A key positive is that KT is expected to appoint a new CEO on a permanent basis in the very near term.

Earlier on August 7, 2023, KT Corporation issued a 6-K filing revealing that the company will organize an Extraordinary General Meeting or EGM on August 30. The first item on the agenda of KT's EGM that requires shareholders' approval is electing Mr. Young-Shub Kim as CEO of the company.

KT Corporation's new CEO, Young-Shub Kim appears to have the relevant industry experience and financial acumen. According to the 6-K filing dated August 7, 2023, Young-Shub Kim was formerly the CFO of LG U+ (Korean conglomerate LG's telecommunications business) between 2013 and 2015, and he also served as the CEO of LG CNS (LG's digital transformation solutions business) for the 2015-2023 time period.

KT Corporation's CFO, Young-Jin Kim, described Young-Shub Kim as a person who will "contribute to further enhancing corporate value " for KT with "his focus on fundamental-centric growth and innovation" at the Q2 2023 results briefing on August 7.

Looking forward, the appointment of a permanent CEO will enable investors to have greater clarity about KT Corporation's future business strategies and corporate plans.

The other key positive relates to KT Corporation's recent quarterly operating profit beat.

Operating income for KT grew by +25.5% YoY to KRW576 billion in the second quarter of 2023 as indicated in the company's Q2 financial results presentation . KT Corporation's actual second quarter operating profit turned out to be +8.1% better than the sell-side's consensus forecast of KRW533 billion (source: S&P Capital IQ ).

KT's above-expectations operating income for Q2 2023 was largely attributable to the success of the company's expense optimization efforts and the good performance of its non-telecommunications businesses. Operating costs for KT Corporation only increased marginally by +0.2% QoQ to KRW5,971 billion in the second quarter of this year. KT Corporation highlighted at its recent second quarter earnings call that it has been working very hard at "making our processes more efficient by making use of AI and other digital transformation technology and also bringing about improvement in the way we do business."

On the other hand, the operating profit contributed by KT's non-telecommunications business subsidiaries as a whole expanded by +72.0% QoQ and +8.4% YoY to KRW168.6 billion in Q2 2023. Specifically, KT Corporation's property (KT Estate) and credit card (BC Card) businesses were the notable outperformers with their operating income up by +28.9% and +10.1%, respectively in the most recent quarter on a QoQ basis. Separately, KT also noted at the Q2 2023 earnings briefing that the company sees its AI Contact Center business' revenue increasing from KRW100 billion this year to KRW300 billion in two years' time.

In summary, KT's new CEO is expected to come onboard pretty soon, and the company has impressed the market with its cost discipline and the favorable results of its non-telecommunications businesses in Q2 2023.

KT Corporation's Major Negatives

There are two risk factors concerning KT that investors need to pay close attention.

One risk factor is the potential earnings misses for KT Corporation in subsequent quarters.

KT guided at the company's recent Q2 results call that its goal is to "bring about a year-over-year OP (Operating Profit) growth" for full-year FY 2023, but it didn't provide specific quantitative financial targets. More significantly, KT Corporation acknowledged at its most recent quarterly earnings briefing that the company could potentially be affected by "inflationary pressures as well as increases in the cost base" in 2H 2023.

Also, the wireless business might be the weak spot for KT Corporation in the second half of the year. Revenue for KT's wireless business only increased very slightly by +0.5% QoQ and +0.8% YoY to KRW1,562 billion in Q2 2023.

Recent news flow suggests that 5G demand might have reached a saturation point in South Korea and it could be tough for KT Corporation and its peers to gain new 5G mobile subscribers in the quarters ahead. A June 2, 2023 Business Korea news article mentioned that "the Korean Ministry of Science and ICT decided to revoke the 5G 28 GHz frequency allocation" for KT and its peers because they have "have been slow in building 28 GHz base stations." Separately, a recent August 17, 2023 Reuters report noted that "Korea's antitrust regulator" "imposed a total of 33.6 billion won ($25.06 million) in fines on three domestic mobile carriers for exaggerating their 5G network speeds."

Another risk factor is about KT Corporation's dividend sustainability.

At the company's recent quarterly earnings call, Citigroup's ( C ) sell-side analyst Sean Lee asked whether KT Corporation is "able to continue on with the dividend plan that the KT was able to stick to over the years." In response to the question, KT Corporation emphasized that the company's "dividend plan" can only be confirmed when the new CEO formally steps into the job.

It is worth noting that KT Corporation highlighted at the Q2 2023 results call that Young-Shub Kim "had shared his vision" about the "scaling up of ICT infrastructure investment" and "provided his views as to how he's going to drive very solid growth" as part of the CEO interview process. Reading between the lines, my interpretation is that KT Corporation could possibly be more biased towards growth going forward with the new CEO, and it is reasonable to be worried that this might limit the upside for future dividends. As per S&P Capital IQ data, the current consensus FY 2022-2025 dividend per share CAGR estimate for KT is a decent +4.5%, and there is a risk that the market is disappointed with the company's new dividend policy.

Closing Thoughts

My analysis leads me to the conclusion that KT has a balanced risk-reward profile taking into account both positives and negatives. This explains why I have made the decision to maintain a Hold rating for KT Corporation.

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