EUR 850.00 For Business Accounts Only

Morningstar | Expect Flattish 2Q for KT Corp but it Remains Good Value. See Updated Analyst Note from 31 Jul 2018

We expect KT to report low-single-digit revenue growth but a slight operating profit decline for its second-quarter result. We retain our fair value of USD 18.30 ahead of the result and continue to base our earnings forecasts on the old accounting standard until the company provides 2017 numbers with the new (K-IFRS 1115) standard. Our forecasts incorporate operating earnings declining by around 5% per year over the next five years which we think is conservative but despite this the stock trades at a price/fair value estimate of 0.74 times and we think it is undervalued. Net debt/EBITDA has reduced from a peak of over 4.5 times at end of 2014 to a more manageable 1 time now due to the sale of noncore assets and improved profitability over the past three years. This is well under a previously mentioned target of 1.5 times so we expect a strong increase in shareholder returns going forward. The 2017 dividend of KRW 1,000 equated to a payout ratio of 43% and we expect dividends to increase to KRW 1,300 in 2018 and stay at that level during our forecast period. At our fair value, KT would trade on a P/E ratio of 12.2 times and a dividend yield of 3.3%. 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.

Recall that, KT's first-quarter result was strong on a like-for-like accounting basis (using the old standard) with service revenue down 0.5% but operating income up 4%. However, the disparity between accounting standards was highlighted with the new accounting standard producing an operating income figure for the first quarter that was 9% below the figure using the old standard. We note that KT's first quarter was stronger than competitor, SKT, which reported core telecom operating income down 10% in the first quarter and followed that up with a 20% decline in the second quarter, also using the old accounting standard.