Drazen_ Elevator Pitch I have a Buy investment rating for KT Corporation (NYSE:KT) [030200:KS]. My earlier April 4, 2024 write-up touched on the favorable and unfavorable read-throughs from the latest events concerning KT. In the current article, I draw attention to the multiple positives for KT Corporation. These include a positive capital return outlook, an improvement in competitive dynamics for the company’s telecommunications business, and a new partnership with Microsoft (MSFT). As such, KT is deserving of a rating upgrade to a Buy. Shareholder Capital Return Outlook Has Turned Positive With my previous early-April 2024 update, I wrote about Korea’s “Corporate Value-up Program” which “is a top-down initiative put in place by South Korean authorities to encourage listed Korean businesses to engage in actions that enhance shareholder value.” There are recent signs indicating that KT Corporation is likely to respond to South Korea’s “Corporate Value-up Program” in a positive manner by making favorable changes to its shareholder capital return approach. Firstly, Australian bank Macquarie issued a research report (not publicly available) titled “Value-up For Shareholders” on May 30, 2024 following the analysts’ meeting with KT. In this report, Macquarie stressed that KT Corporation’s “management is committed to enhancing shareholder returns, both in terms of dividends paid and share cancellation, which is in line with the government’s Value-Up program.” Secondly, KT Corporation’s management comments at its most recent quarterly results briefing last month had positive takeaways for the company’s expected shareholder capital return initiatives in the future. Specifically, KT emphasized at the Q1 2024 earnings call in May that the company “will continue to do what it can to enhance corporate value” and “resort to various different ways to make sure that we expand on the shareholder return.” Thirdly, actions speak louder than words. KT Corporation executed on the “retirement of treasury shares” equivalent to “2% of total issued shares” last month, as per its May 9, 2024 announcement. It has been the norm for Korean companies to repurchase shares, and keep them as treasury shares rather than canceling these shares. A recent June 5, 2024 The Korea Times news commentary highlighted that “81 percent of all listed companies in Korea held treasury stocks, mostly in a range between 1 percent and 5 percent” as of end-2023. Therefore, it is encouraging to see KT make the move to cancel a substantial amount of treasury shares. KT Corporation’s consensus next twelve months’ dividend yield is 5.6% as per S&P Capital IQ data. The stock’s actual forward shareholder yield (repurchases and dividends divided by market capitalization) could be better, assuming that the company does share buybacks and cancels more of its treasury shares like what it did in May. Concerns About Stiffer Competition For Telecommunications Business Have Eased The South Korean telecommunications industry currently has three players, namely KT Corporation, SK Telecom (SKM), and LG Uplus [032640:KS]. Earlier in the year, there were fears that KT would have to contend with a new rival. Korea JoongAng Daily reported on February 1, 2024 that Stage X “was selected to become the country’s fourth mobile carrier after winning a bid to carry the 5G 28 gigahertz (GHz) spectrum.” It is natural to assume that an increase in competitive intensity with a new entrant could lead to slower top line growth (market share loss) or lower earnings (increased investments to stay competitive) for KT Corporation’s telecommunications business. However, a recent June 14, 2024 news report published by The Korea Times indicated that “South Korea’s Science Ministry” will “revoke the license of new mobile carrier Stage X” which was attributed to its “inability to pay the full capital” for the spectrum acquisition. The telecommunications industry is a capital-intensive one. It is always tough for new players to raise sufficient funds and attempt to overcome the incumbency advantage (e.g. fixed cost leverage driven by scale) enjoyed by the existing players, as seen with the recent turn of events. As such, worries regarding the threat of a new entrant in Korea’s telecommunications markets have eased with this latest development, and this should be a positive re-rating driver for KT. New Partnership With Microsoft Is A Favorable Development Korean media outlet published a news article on June 4, 2024 mentioning that KT Corporation will work with Microsoft to “jointly conduct AI and cloud research projects” as part of a new partnership. The company’s cloud business known as KT Cloud saw its revenue grow by an impressive +17.8% YoY in the first quarter of 2024. This was much faster than KT Corporation’s overall +3.3% YoY top line expansion for Q1 2024. Also, KT Corporation highlighted at its Q1 2024 earnings briefing that it is looking at “new business opportunities by applying AI capabilities (my emphasis) into our existing IT business and data cloud business (my emphasis).” It is logical to think that initiatives relating to cloud and AI will be major growth engines for KT going forward. The recent partnership with Microsoft could boost KT’s efforts to grow in the areas of AI and cloud in a substantial way. According to The Korea Economic Daily’s June 4, 2024 media report, it is speculated that the KT-Microsoft partnership could involve “multi-billions of dollars” of investments as part of these two companies’ “joint projects.” KT Corporation is likely to be in a better position to command superior valuations, when the company’s exposure to high-growth business areas like cloud and AI grows with the Microsoft partnership. Key Risks There are certain risk factors that investors should be aware of. The first risk factor is below-expectations shareholder capital return. If the company cuts its dividend or doesn’t retire more treasury shares, this will be disappointing from the perspective of shareholder capital return. The second risk factor is another new entrant for the Korean telecommunications sector. If the Korean authorities give the go-ahead for a new player to offer telecommunication services, this will translate into tougher competition for KT Corporation. The third risk factor is a weaker-than-expected growth for KT Corporation’s cloud business. A slower-than-expected shift in business mix towards faster growing businesses like KT Cloud will affect the company’s overall growth in a negative way. Concluding Thoughts KT Corporation is now trading at a consensus next twelve months’ normalized EV/EBITDA multiple of 3.1 times as per S&P Capital IQ valuation data, which is undemanding in my opinion. I am bullish on KT, as I think that an expansion of its EV/EBITDA metric to the mid-single digit level is possible, considering the multiple positives for the stock mentioned in this article.
sekar nallalu Cryptocurrency,KT,The Value Pendulum KT Corporation: Multiple Positives (Rating Upgrade)