Earnings Performance of Subsidiaries Disappointing
The author is an analyst of Shinhan Investment Corp. He can be reached at mj1224@shinhan.com. -- Ed.
Initiate coverage with BUY and target price of KRW32,000
We initiate our coverage of KT with a BUY rating and a target price of KRW32,000, based on a target EV/EBITDA of 2.5x (30% discount to the average EV/EBITDA seen during the LTE era). KT shares are seen attractive at current valuations. Like other telcos, ARPU is expected to increase with the introduction of 5G services and the IPTV business should continue on an uptrend. Operating profit is forecast to grow this year, ending a three-year downtrend. Dividend yield has climbed up to 4.8% on share price correction.
2020 operating profit forecast at KRW1.18tr (+2.7% YoY)
KT is expected to have registered operating profit of KRW360.1bn (-10.4% YoY) on sales of KRW5.92tr (+1.5%YoY) for 1Q20, meeting the consensus forecast of KRW354.3bn. Cumulative 5G service subscribers are estimated to be 1.79mn (+375,000 QoQ). A YoY drop in operating profit should be inevitable through 1Q. Earnings are projected to improve toward 2H20 on accelerating 5G subscriber additions.
For 2020, we forecast sales at KRW24.8tr (+2.1% YoY) and operating profit at KRW1.18tr (+2.7% YoY). We assumed that 5G subscribers will reach 3.46mn (+2.04mn YoY) and ARPU KRW33,000 (+2.8% YoY) at end-2020. The burden of labor costs should ease gradually, with natural attrition of employees estimated to rise from 500 in 2019 to 700 in 2020 and 1,000 in 2021.
Disappointing earnings performance of subsidiaries
Subsidiaries will likely record sluggish earnings due to the COVID-19 outbreak. BC Card has seen a slowdown in offline payment transactions. KT estate has been affected by weak market conditions for hotels and real estate. Nasmedia’s ad business has been hit by the outbreak.
There are some positives. BC Card will acquire KT’s stake in K-Bank in order to increase its stake in the internet-only bank to 34%. KT has also received the green light for the property development project in Gwangjin-gu, Seoul at end-2019.
Even if KT becomes the largest shareholder of K-Bank indirectly through BC Card, steady injection of capital into the bank will be inevitable before it turns positive. As for the property development, we need to consider uncertainty over the real estate market.