KT - KT Corporation: Watch Upcoming Earnings Release And New Capital Return Framework

2023-11-02 10:53:43 ET

Summary

• KT's earnings are expected to decline YoY in Q3 2023 on the back of higher compensation and marketing costs.
• KT Corporation has guided that it will continue to return half of its normalized net profit to shareholders as dividends or repurchases in the three-year period between 2023 and 2025.
• My rating for KT is a Hold, after previewing the company's Q3 results and assessing its updated shareholder return policy.

Elevator Pitch

I still have a Hold rating assigned to KT Corporation ( KT ) [030200:KS] stock.

My prior write-up for KT Corporation published on August 28, 2023 highlighted several favorable and unfavorable factors relating to the stock's attractiveness as a potential investment. In the latest article, I preview KT Corporation's upcoming Q3 2023 financial results and evaluate the company's updated shareholder capital return policy.

Investors will be encouraged by KT's new shareholder return framework, but the company's third quarter financial performance is less likely to excite the market. Taking into account these factors, I have left my Hold rating for KT Corporation unchanged.

My Bet Is On KT Reporting Poor Q3 Results

A few days ago on October 31, 2023, KT Corporation issued a 6-K filing disclosing that it will "hold a conference call for the 2023 Q3 earnings results" on Tuesday, November 7, 2023. As such, it is timely to do a preview of KT's third quarter earnings now, as the company's actual quarterly financial performance will have a meaningful impact on its share price in the near term.

Based on consensus data sourced from S&P Capital IQ , the sell-side analysts are of the view that KT Corporation's Q3 2023 results will be lackluster. In specific terms, the market's consensus financial forecasts point to KT's EBITDA and pre-tax earnings decreasing by -5.6% and -8.8% to KRW1,283.4 billion and KRW400.4 billion, respectively in the third quarter on a YoY basis.

My prediction is that KT Corporation's actual Q3 2023 financial performance could be as bad as what the analysts are expecting, or even worse, due to two factors.

The first factor relates to employee compensation.

In its fiscal 2022 20-F filing , KT Corporation cautioned that its "collective bargaining agreement (with the labor union) expires on September 5, 2023" or in the third quarter. A recent commentary piece in local media publication The Korea Economic Daily highlighted that "militant labor unions and pro-union policies are holding back entrepreneurs" in South Korea, citing examples of large Korean businesses such as POSCO Holdings ( PKX ) and Kia being under pressure from unions. Therefore, it is reasonable to assume that KT Corporation will likely be hit by higher compensation costs in Q3 2023, considering the bargaining power of labor unions in Korea.

The second factor is A&P (Advertising & Promotional) spend.

The Korea Bizwire reported in early October that "the (Korean) telecommunications industry is gearing up for an intense marketing battle leading up to the launch of the iPhone 15." It is highly probable that KT Corporation would have ramped up A&P spending in September in preparation for the iPhone 15 launch.

The introduction of a new Apple ( AAPL ) device is a major marketing event for South Korean telecommunications companies. According to a July 20, 2023 The Korea Herald news article which cited the results of a Gallup survey, Apple's iPhones have a 65% market share among young Koreans in the 18-29 year old age cohort. As such, KT Corporation isn't likely to hold back on spending relating to marketing efforts for the new iPhone to remain competitive with rivals.

In conclusion, KT Corporation's Q3 2023 financial results release on November 7 is most probably going to disappoint investors, as higher compensation and A&P costs are likely to hurt KT's earnings.

Overhang Regarding Uncertainty Over Capital Return Policy Is Removed

KT Corporation revealed the appointment of a new CEO at the end of August this year, but it was only a few weeks ago that KT finally provided clarity about its shareholder capital return approach.

An October 17, 2023 6-K filing published by KT Corporation noted that the company has committed to returning "50% of adjusted annual net income" for the FY 2023-2025 time frame to shareholders in the form of both dividends and share repurchases. KT also mentioned in this 6-K filing that the company's FY 2023-2025 dividends per share will not be lower than what it distributed in dividends for FY 2022. In addition, KT Corporation indicated that there are plans for the company to change its dividend payment frequency from annual to quarterly by Q1 2024.

I have a positive view of KT Corporation's updated or new shareholder capital return policy.

Firstly, KT Corporation is sticking with its existing approach of distributing half of its earnings as buybacks or dividends to the company's shareholders. Previously, there were worries that the new CEO would favor capital investment over capital return, and make a decision to lower the shareholder return ratio to below 50%.

Secondly, KT is essentially proposing a "progressive dividend policy" for the three-year time period between FY 2023 and FY 2025. KT Corporation's new shareholder return policy indicates that future annual dividends for the FY 2023-2025 time period will be at least at the same level as what was paid out last year in absolute terms.

Thirdly, the company's planned switch to a quarterly dividend payment frequency starting in the first quarter of 2024 will help to attract income-focused investors who prefer to invest in stocks with more frequent dividend distributions.

Concluding Thoughts

KT's Q3 2023 earnings (to be released on November 7) are likely to be negatively impacted by A&P and employee compensation cost pressures. On the flip side, KT Corporation's updated capital return policy is pretty shareholder-friendly in my opinion. My existing Hold rating for KT Corporation remains intact.

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