KT Corporation: Multiple Tailwinds (NYSE:KT)

Elevator Pitch

I continue to rate KT Corporation’s (NYSE:KT) [030200:KS] stock as a Buy.

In my earlier January 25, 2022 write-up for KT, I focused on “KT Corporation’s new partnership” with a bank and the “listing” of one of its investments in the digital banking space.

I reiterate my bullish view on KT with this latest article highlighting the multiple tailwinds for the stock. An increase in wireless ARPUs (Average Revenue Per User) driven by a higher 5G penetration is positive for the company’s telecommunications business. I also hold the opinion that KT’s non-telecommunications businesses like cloud & internet data centers and media & content have substantial room for growth in the future. Separately, KT Corporation’s status as a high-yield dividend paying stock should make it an attractive investment candidate in the eyes of many investors.

Telecommunications Business Should Benefit From Higher Mobile ARPUs

Fitch refers to KT Corporation as a company with “the second-largest market share in the wireless market” in South Korea. As such, KT is one of the key beneficiaries of an increase in Korea’s 5G penetration rate and mobile ARPUs.

A October 24, 2022 research report published by management consultancy Analysys Mason found that wireless ARPUs for South Korea reversed from a -11.4% drop between Q2 2015 and Q2 2019 to a positive +9.9% growth for the Q2 2019-Q2 2022 time period. In its report, Analysys Mason attributed the increase in Korea’s wireless ARPUs to “the migration of a large share of customers to 5G plans.”

At the company’s investor call in August 2022, KT Corporation revealed that it has a target of increasing its share of 5G subscribers (as a proportion of its total mobile or wireless subscriber base) from 54% as of the end of the first half of the year to 60% by end-2022. Apart from growing its percentage of its subscribers signed up on 5G plans, KT also stressed at its August 2022 investor call that new “value-added services” will be another key driver of the company’s future mobile ARPU growth.

Non-Telecom Businesses To Watch

There are two non-telecom businesses that investors with an interest in KT should watch closely. Specifically, they are the media & content and cloud & IDC (Internet Data Center) businesses.

KT Corporation disclosed at its investor briefing in August this year that the company has spun off its cloud & IDC business “as a separate special entity.” The company had made this decision, because it views the cloud & IDC business “as a solid growth pillar”, and it has plans in place to “build additional IDC capacity” to capitalize on such growth opportunities.

It is noteworthy that KT is the largest operator of IDCs in the country. KT Corporation operates 14 IDCs in Korea, while its rivals LG U+ and SK Broadband run 11 and 5 IDCs, respectively. As the market leader in Korea’s IDC market, KT is in a good position to benefit from the strong growth of the industry in the future. As a reference, market research firm Arizton predicts that the value of the Korean data center will expand from $3.9 billion in 2021 to $5.8 billion in 2027.

Separately, there is excitement about KT Corporation’s media & content business.

Studio Genie, KT’s media production business, had a big hit with its drama, “Extraordinary Attorney Woo.” According to an August 17, 2022 news article published in The Korea Herald, Extraordinary Attorney Woo “topped Netflix’s (NFLX) latest weekly viewership chart of non-English TV shows for the third consecutive week” in mid-August.

KT Corporation revealed at its August 2022 investor call that the “brand awareness of the ENA channel improved” thanks to “the popular hit from our original content.” In other words, KT has benefited from the synergies between its media production business (Studio Genie) and pay television business (ENA Channel).

As an indication of the growth potential of KT’s media & content business, Korea’s biggest entertainment company, CJ ENM has chosen KT to be its key partner as seen with recent collaborations. KT Corporation sold a 9% equity interest in Studio Genie to CJ ENM for KRW100 billion earlier this year. Separately, KT Corporation has proposed to merge its streaming video platform, Seezn, with its peer Tving (owned by CJ ENM).

Appealing Dividend Yields

Apart from the decent growth prospects of KT’s telecom and non-telecom businesses, investors’ shift in preferences for dividend-paying names in the current market environment should be a tailwind for KT Corporation.

Based on the sell-side analysts’ consensus financial data sourced from S&P Capital IQ, KT Corporation boasts reasonably high consensus forward dividend yields of 5.9%, 6.2%, and 6.7% for fiscal 2022, 2023, and 2024, respectively. Expectations of KT paying a considerable amount of dividends in the future are supported by the fact that the company has committed to a healthy 50% dividend payout ratio for FY 2022 as highlighted at its early-August investor briefing.

Closing Thoughts

My analysis leads me to the conclusion that KT Corporation is a Buy. Looking forward, KT’s share price should rise on the back of multiple tailwinds.