Time to Re-evaluate KT
The author is an analyst of NH Investment & Securities. He can be reached at jaemin.ahn@nhqv.com. -- Ed.
Although we look at our cell phones several times a day, most of us are unaware that earnings at Korean telecom service companies are on the upswing. Amid mounting market uncertainties, KT offers not only stable earnings but also promising growth potential. We believe now is the time to re-evaluate KT.
Core telecom business and non-telecommunications affiliates delivering even earnings growth
We maintain a Buy rating and a TP of W46,000 on KT, continuing to suggest it as our sector top pick. In addition to eye-catching sales and OP growth being seen at its wireless domain in response to 5G effects, we also expect the firm to show solid earnings for the B2B business (DIGICO) going forward. And, OP contributions from subsidiaries (including SkyLife, BC Card, and KT Estate) should remain healthy. KT’s content business is also coming into the spotlight as of late thanks to the popularity of drama Extraordinary Attorney Woo.
On the heels of sound performance last year, earnings momentum for both KT’s telecommunication domain and non-communication subsidiaries is set to sustain strong in 2022. Among the big-3 domestic telcos (ie, SKT, KT, LG U+), we believe that KT’s top-line growth will be the most noticeable, and we note that it offers the most attractive valuation (2022E P/E of 6.6x) among the three. We see 2022E DPS of W2,200 and DY of 5.9%.
2Q22 preview: Earnings to satisfy consensus if excluding one-off costs
KT should show 2Q22 sales of W6.3tn (+5.3% y-y, +1.1% q-q) and consolidated OP of W485.2bn (+2.0% y-y, -22.6% q-q), with OP likely to miss our previous estimate of W525.5bn and consensus of W499.6bn. Having been spun off from KT, the cloud business began to contribute to KT’s consolidated earnings as an affiliate. Around W40bn in one-off costs from financial support for its employees to purchase KT shares will likely be booked. If stripping out these one-off factors, the telco’s earnings for 2Q22 should come in healthy, as was the case for 1Q22.
We estimate that 2Q22 sales at the company’s wireless business upped to W1.57tn (+3.5% y-y), with its wireless ARPU reaching W32,527 (+3.5% y-y, +0.7% q-q), the highest level among Korean telecom players.
We believe that marketing costs remained well under control in 2Q22 at W614.4bn (-4.3% y-y, +0.2% q-q), continuing to support OP growth.