LeoPatrizi
Elevator Pitch
I rate KT Corporation (NYSE:KT) [030200:KS] as a Hold. In my previous article written on January 14, 2024, I shared my thoughts on the expected performance of the company’s telecommunications and non-telecommunications businesses for the future.
This latest update details recent developments, which point to a Hold rating for KT. The major positives for KT Corporation include the potential listing of its fintech associate, K Bank, and the increase in investor interest toward Korean companies in general. On the flip side, the key negatives for KT include the challenging outlook for its telecommunications business and uncertainty over its capital allocation approach.
Proposed K Bank Public Listing Could Drive A Re-Rating Of KT’s Valuations
A recent March 25, 2024 news commentary published in The Korea Economic Daily noted that “K Bank, the digital banking unit of” KT Corporation is going ahead with “a preliminary review of its listing” in May this year with a targeted market capitalization in the KRW5-6 trillion range.
KT Corporation’s owns a 33.7% equity interest in K Bank. This means that KT’s stake in K Bank might be valued at KRW2 trillion assuming that the latter is successfully listed at a KRW6 trillion market capitalization as reported in the media. As a comparison, KT Corporation’s current market capitalization is around KRW9.3 trillion. In other words, KT’s equity stake in K Bank is roughly equivalent to about a fifth of its current market capitalization.
It is reasonable to assume that the value of K Bank is “hidden” now, as this fintech or internet banking company is one of KT Corporation’s multiple associates and joint ventures and doesn’t disclose its financials separately. If and when K Bank is publicly listed, K Bank will have its own separate market valuation and reveal its stand-alone financial statements. Therefore, it is realistic to think that KT could witness a positive valuation re-rating upon the successful listing of its fintech associate, K Bank, at a favorable price.
Korean Companies Are Drawing More Attention From Investors
South Korean companies are getting on the radar of investors recently, and this could be a positive development for KT Corporation.
On April 2, 2024, South Korea’s financial regulator, Financial Services Commission, issued an announcement disclosing that it is introducing “new incentive programs planned for the Corporate Value-up Program.” Specifically, Korean companies which implement shareholder-friendly initiatives (e.g. improving corporate transparency, etc.) might not have to pay certain fees in connection with their listings on the Korea Stock Exchange. The “Corporate Value-up Program” 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, which was first revealed in February 2024.
The “Corporate Value-up Program” has put Korean stocks in the spotlight. A March 24, 2024 article published in The Korea Times mentioned that “representatives of multiple international financial firms” came to South Korea in the final week of March, as a result of renewed interest in Korean businesses thanks to the new “Corporate Value-up Program.” An earlier March 14, 2024 research report (not publicly available) titled “Korea Financial Flows” issued by Bank of America Corporation (BAC) highlighted that “net inflows into Korean equities” for the first two months of 2024 was $7 billion higher as compared to the same period a year ago.
As investor interest in South Korean companies grows, KT Corporation is likely to be a key beneficiary of increased fund flows. KT is a sufficiently large listed company with a market capitalization of almost $7 billion and trades at an appealing trailing P/B multiple of 0.53 times (source: S&P Capital IQ).
Recent Mobile Service Plan Changes Might Be Reflective Of Challenging Outlook
The latest news flow indicates that KT Corporation has made some meaningful changes to its mobile service plans. This could indicate that the company is eager to retain its existing wireless subscribers as the outlook for the Korean telecommunications market becomes more unfavorable.
Maeil Business Newspaper reported in mid-March that KT’s roaming service will allow for an increase in the number of users sharing this service from three previously to five now. Separately, a March 29, 2024 Pulse News Korea article noted that KT Corporation has come up with a new mobile service plan which offers “lower contract termination fees.”
Notably, KT Corporation acknowledged at its FY 2023 earnings call the possibility of a “slow down” in the growth of the company’s telecommunications business given that “5G penetration rate has reached (a reasonably high) 73%” in South Korea. As such, KT’s recent tweaks to its mobile service plans do serve as a confirmation that the growth of its Korean telecommunications business is likely to be slower in the near term.
Uncertainty Over Capital Allocation
There is uncertainty regarding KT’s allocation of capital.
KT Corporation mentioned at its FY 2023 results briefing that “for this year, we currently do not have plans for the non-ordinary shareholder share buyback and cancellation of our shares at this moment.” The company spent KRW300 billion repurchasing its own shares in 2023, and investors could possibly be disappointed if KT Corporation’s 2024 share buybacks are lower.
Separately, a March 22, 2024 news report published in The Chosun Daily drew attention to the fact that KT Corporation’s R&D (Research & Development) expenses decreased by -2.3% in the previous year. This casts doubts about KT’s commitment to investing for future growth, especially when the company is trying to diversify into non-telecommunications businesses.
KT has a tough balancing act on its hands. The company needs to strike a good balance between capital return and capital investment to satisfy the expectations of investors.
Final Thoughts
I continue to have a Neutral view of KT Corporation. On one hand, I am encouraged by the fact that there is growing interest in listed Korean businesses and KT’s associate K Bank is coming closer to realizing a public listing. On the other hand, I am not exactly clear about KT’s capital allocation approach for the current year, and its telecommunications business’ prospects don’t seem to be rosy.
