KT's Core Telecom Business Is Solid With Growth From 2B and Subsidiaries

South Korea has traditionally displayed many of the factors we like in a telecommunications market. On the wireless side, there are only three national operators with their own networks, and they have behaved rationally, particularly over the past three to four years. On the fixed-line side, competition has been restrained, as there are no major cable operators. However, the regulator can be inconsistent and is too involved in decisions that we think should be left to the market, and the operators have on occasion behaved less rationally. KT is the incumbent fixed-line telecom operator in Korea. The firm is also the largest broadband provider and second-largest wireless telecommunications operator. It has a growing television business and is entering into other businesses, including cloud computing and payment processing. 

We like KT's position in the telecommunications market. After several years of strong competition, the dominant mobile operator, SK Telecom, allowed its market share to fall below 50% during 2015 and it has gradually fallen to around 43% since then, which we see as a sign that mobile market competition may have decreased. The South Korean government has also encouraged reduced marketing expenses several times, which is also helping profitability in the mobile market. 

KT has recovered after reporting losses in both 2013 and 2014 and being forced to cut its dividend in 2014 to preserve cash on its stretched balance sheet. It returned to paying a dividend in 2015 and by 2021 was back to a 50% dividend payout ratio. The potential earnings from its less visible real estate portfolio could provide some upside to the company's earnings after the easy cost-cutting is complete. Additional upside could be provided by improving profitability from its fast-growing IPTV business. The IDC and cloud services businesses have been showing strong growth recently and we would expect KT to skew investment toward those over the next few years.

Business Strategy & Outlook

We believe Korea Telecom has a narrow economic moat due to efficient scale. 

Prior to 2012, Korea Telecom, or KT, was generating a return on invested capital, above its weighted average cost of capital of 7.5%, and it had a narrow moat, in line with most other incumbent telecom operators. However, ROIC fell below WACC from 2012 to 2013, and in 2014, when we assigned a no-moat rating to the company, we did not forecast ROIC to again exceed WACC in our forecast period. 

However, the company instigated a number of changes over 2014 to 2015 that have helped restore both its balance sheet and our forecasts. The most notable of these were the large redundancy program instigated in 2014, which took out around KRW 700 billion (USD 640 million) per year in costs, and the sale of its two noncore finance businesses, KT Capital and KT Rental, in 2015; along with improved earnings, this helped reduce net debt/EBITDA from a peak of over 4.6 times in 2014 to a much more comfortable 1 times in 2016. ROIC returned to an above-WACC level in 2015 and has remained either at WACC or above except for the COVID-19 years. 

Fixed-line operators, like Korea Telecom, have traditionally been rewarded with narrow moats due to efficient scale precluding the economical build-out of competitors. They used these largely monopoly networks, which were heavily depreciated, to earn returns well above WACC (30%-40% operating margins were not uncommon for legacy monopoly fixed-line operators). But in most markets, fixed-line revenue has been in decline for many years, as customers are substituting fixed-line traffic for mobile traffic, while new entrant fixed-line operators provide competition for some of the more profitable customers in high density areas. With a largely fixed-cost base, deteriorating fixed-line revenue has a large negative impact on margins (fixed line contributes around 23% of KT’s revenue), but we think fixed lines are still providing decent returns for KT. 

About 34% of service revenue is generated from wireless, where KT is the clear number-two player (SKT has around 45% market share, KT has 30%, and LG Uplus has 25%). The government has tried to attract a credible fourth operator into the mobile market seven separate times since 2010, but has failed to do so each time. Companies have bid, but have failed to provide a credible plan in terms of network and service rollouts and fund raising. Despite new entrants having entered the Japanese and Singaporean mobile markets, we believe that a fourth entrant in Korea is unlikely. With full penetration of mobile phones and existing operators that are making decent, but not overly excessive, returns, we believe that new entrants would struggle to raise the financing required to build out a new network and withstand the years of startup losses. 

The remaining revenue is generated via nontelecom businesses such as IT services, e-commerce, financial services, and real estate, where it has no moat. Taken as a whole, we believe these other businesses are not as profitable as the fixed-line and mobile businesses, so the profit skew would be even more in favor of the telecom businesses.

Narrow

Economic Moat

KT Corporation

KT Corp. engages in the provision of integrated telecommunication services. The company operates through the Customer and Marketing businesses. Its services include wire and wireless phones, internet, and other communication. The company was founded on December 20, 1981 and is headquartered in Seongnam-si, South Korea.

Earnings data Q2 2023

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KT Corporation (NYSE:KT ) Q1 2023 Earnings Conference Call May 11, 2023 3:00 AM ET Company Participants Seung-Hoon Chi - Investor Relations Officer Young-Jin Kim - Chief Financial Officer Conference Call Participants Jaemin Ahn - NH Investment & Securities Soojin Kim - Mirae Asset Securities Sean Lee - Citigroup Operator [Foreign Language] [Interpreted] Good morning and good evening. Thank you all for joining this conference call.

KT Corporation (KT) Q1 2023 Earnings Call Transcript

SEOUL, South Korea , April 28, 2023 /PRNewswire/ -- KT Corporation (NYSE: KT), South Korea's largest integrated telecom and digital platform service provider, announced that it has filed its Form 20- F Annual Report on April 28, 2023 for the year ended December 31, 2022 with the Securities and Exchange Commission of the United States. The report can be accessed on KT's English website at https://corp.kt.com/eng in the Investors section under Business Report as well as the SEC's Edgar database at http://www.sec.gov/.

KT Corp. Files 2022 Annual Report on Form 20-F

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KT Corporation (NYSE:KT ) Q3 2022 Results Conference Call November 8, 2022 1:00 AM ET Company Participants Kim Young Jin - CFO Conference Call Participants Hoi Jae Kim - Daishin Securities Joonsop Kim - KB Securities Neale Anderson - HSBC Unidentified Company Representative [Foreign language] Good afternoon. Let's begin KT's Third Quarter 2022 Earnings Presentation.

KT Corporation (KT) Q3 2022 Earnings Call Transcript

The prospects of KT Corporation's telecom business are good, considering the potential uplift in wireless ARPUs from an increase in 5G penetration rate and the introduction of value-added services. KT's non-telecom businesses like media & content and cloud & internet data center stand out for their growth potential.

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KT Corporation: Hedge Inflation With This Korean Telecom

KT Corporation (NYSE:KT ) Q2 2022 Results Conference Call August 10, 2022 2:00 AM ET Company Participants Seung Hoon Chi - Investor Relations Officer Young Jin Kim - Chief Financial Officer Conference Call Participants Joonsop Kim - KB Securities Hoi Jae Kim - Daishin Securities Seyon Park - Morgan Stanley Operator Good morning, and good evening. Thank you all for joining this conference call.

KT Corporation (KT) Management on Q2 2022 Results - Earnings Call Transcript

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