KT: Still Undemanding At 0.6x P/B

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About: KT Corporation (KT), Includes: SKM
by: Hyundai Motor Investment & Securities

Summary

Bullishness of Korea telco shares is attributable to dissipating uncertainties related to regulatory issues, mounting expectations for 5G, and attractive dividends.

Fading uncertainties concerning regulatory issues apply to all three big telcos and the impacts of 5G on Korea's three telcos are almost equal.

Korean telco sector’s recent impressive price performance has more to do with long-term growth prospects and expectations for stock re-ratings rather than with short-term earnings outlooks.

Investment highlights

The recent bullishness of telco shares is attributable to dissipating uncertainties related to regulatory issues, mounting expectations for 5G, and attractive dividends. Declining uncertainties concerning regulatory issues apply to all three big telcos and the impacts of 5G on the three telcos are almost equal, unlike the time that led up to the LTE era. However, KT’s (KT) 49% foreign ownership means there is little room for more foreign investors, thus the stock’s price elasticity is probably the lowest among peers. The telco sector’s recent impressive price performance has more to do with long-term growth prospects and expectations for stock re-ratings rather than with short-term earnings outlooks. As such, we are focusing more on robust fundamentals than unfavorable investor appetite (e.g., the foreign ownership cap). A solid business structure combined with strong asset value and 5G expectations could work to bolster shares up a notch from the current level (0.6x P/B).

Major issues and earnings outlook

Under the old accounting standard, 3Q18 revenue is estimated at KRW5.84tn (+0.2% YoY) and operating profit KRW334bn (-11.5% YoY). We believe mobile revenue stayed flat due to a series of regulatory measures introduced to help the handicapped and disadvantaged (increased discount for those opting for discounted plans rather than subsidies, and the telecom bill discount for the underprivileged and the elderly). Marketing costs have remained stable for the most part but the launch of flagship models by major smartphone makers undermined the efforts somewhat. The absence of the one-off gain (the writeback on VAT related to subsidies) seen in the previous quarter also had an impact on earnings. KT was able to pace down the decline of mobile ARPU by introducing “Data On” plans which attracted 500K subscribers/month and created upselling effects. Fixed-line telecom revenue, spearheaded by IPTV and GiGA Internet, continued to grow. As the law regulating the market share of TV operators has been scrapped, the pay TV market may see more M&A activities and structural reshaping.

KT plans to keep its dividend yield for 2018 at a similar level to that of 2017. We recommend focusing more on company fundamentals than the foreign ownership cap. It is time for the shares to escape their undervalued status. We reiterate BUY and our target price of KRW37,000.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.