AI And Cloud Transformation And Partnerships Will Drive Future Opportunities

Key Takeaways

• Strategic transformation into AICT and partnerships in AI/cloud sectors are set to enhance revenue and operational efficiency through new business offerings.
  
• New subsidiaries and focus on B2B services aim to streamline operations, boost profitability, and increase shareholder value.
  
• KT's transition to an AICT company faces execution risks, impacting revenue, asset efficiency strategies, and regulatory challenges, with potential strain from share buybacks.

Catalysts

Provides integrated telecommunications and platform services in Korea and internationally.

• KT's strategic transformation into an AICT company, with innovative business offerings and a partnership with Microsoft, is expected to boost revenue significantly as the company expands its presence in AI and cloud sectors.
  
• The restructuring of KT's workforce and creation of new subsidiaries in network services and big data are expected to streamline operations and enhance net margins by improving operational efficiency.
  
• The anticipated growth in the B2B service sector, driven by increased demand for AX services, is likely to contribute to higher revenue and improved profitability, particularly with the expansion of high-margin subscription-based models.
  
• KT's mid-term financial goals, including tripling AI and IT business revenue and enhancing shareholder value through a substantial share buyback and cancellation program, aim to increase earnings and return on equity by 2028.
  
• The development of new revenue streams, such as AI-powered media services and expansion of IDC and cloud through partnerships, signals potential for significant revenue growth and improved earnings over the next few years.

KT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KT's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 4.9% in 3 years time.
• Analysts expect earnings to reach ₩1418.7 billion (and earnings per share of ₩7154.95) by about January 2028, up from ₩1163.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩1973.9 billion in earnings, and the most bearish expecting ₩1021.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.2x on those 2028 earnings, down from 9.3x today. This future PE is lower than the current PE for the US Telecom industry at 18.8x.
• Analysts expect the number of shares outstanding to decline by 6.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.44%, as per the Simply Wall St company report.

KT Future Earnings Per Share Growth

Risks

• There may be uncertainties and challenges related to KT's transformation into an AICT company, particularly in innovating its business portfolio and workforce. This transition bears execution risks, potentially impacting future revenue growth and net margins if not managed effectively.
  
• The dependency on achieving the ambitious ROE growth, largely based on asset efficiency and use of capital, suggests potential risks in asset disposal strategies or inadequate returns on capital investments, which could affect earnings and financial stability.
  
• The planned share buyback and cancellation program, while intended to boost shareholder value, could strain financial resources if the company faces unexpected market conditions that impact its profitability and capability to sustain these payouts.
  
• Declines in various business segments, such as the content subsidiary and credit card sales at BC Card, illustrate vulnerabilities in sustaining revenue growth, potentially impacting overall earnings if these downward trends cannot be reversed.
  
• Regulatory challenges, particularly in expanding the cloud services business in the public sector, create barriers to revenue growth in those areas, impacting KT's ability to meet projected financial targets.

Valuation

• The analysts have a consensus price target of ₩54554.55 for KT based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩85000.0, and the most bearish reporting a price target of just ₩40000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩28663.1 billion, earnings will come to ₩1418.7 billion, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 6.4%.
• Given the current share price of ₩43850.0, the analyst's price target of ₩54554.55 is 19.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.