AI Transformation Will Optimize Workforce And Boost Future Profitability

Key Takeaways

• Strategic partnerships and AI innovation are poised to boost B2B revenue and enhance profitability by optimizing operations and expanding market presence.
  
• Share buyback and focused corporate ventures aim to increase shareholder returns and strengthen overall financial performance.
  
• Workforce restructuring and high operating expenses have significantly harmed profitability, while declining revenue streams and debt management pose ongoing financial challenges.

Catalysts

Provides integrated telecommunications and platform services in Korea and internationally.

• KT's strategic partnership with Microsoft aims to drive future growth by developing Korea-specialized AI models and secure public clouds, which can boost B2B revenue and enhance structural profitability. These initiatives are anticipated to impact revenue and operating profit positively.
  
• The company's transformation into an AICT-driven enterprise seeks to optimize its workforce and rationalize underperforming businesses, indicating potential improvements in net margins and earnings due to cost efficiencies and focused growth areas.
  
• KT's commitment to media business innovation through AX technology and scaling up IT infrastructure suggests an expected increase in revenues and operational efficiency, contributing to a stronger bottom line.
  
• The planned corporate value enhancement initiatives, including a ₩1 trillion share buyback and cancellation program, are expected to enhance shareholder returns and boost earnings per share (EPS).
  
• KT's focus on expanding strategic partnerships and product launches, especially in AICT and cloud services, is poised to drive significant growth in B2B and media service revenues, potentially increasing the overall revenue and profitability of the company.

KT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KT's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 6.1% in 3 years time.
• Analysts expect earnings to reach ₩1740.0 billion (and earnings per share of ₩7778.24) by about March 2028, up from ₩503.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩2027.9 billion in earnings, and the most bearish expecting ₩1487.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.1x on those 2028 earnings, down from 23.2x today. This future PE is lower than the current PE for the US Telecom industry at 19.5x.
• Analysts expect the number of shares outstanding to decline by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.71%, as per the Simply Wall St company report.

KT Future Earnings Per Share Growth

Risks

• The increase in one-off labor costs due to workforce restructuring led to a significant decline in operating profit by 50.9% year-on-year, affecting overall profitability.
  
• The decrease in net profit by 54.5% year-on-year highlights risks related to profit margins due to restructuring and one-time costs.
  
• High operating expenses, up 3.6% year-on-year, driven by workforce revamping and higher depreciation, suggest potential pressure on future earnings.
  
• Revenue from KT Skylife and content subsidiaries declined due to a contracting market and pay TV subscriber decreases, potentially impacting future revenue streams.
  
• Debt-to-equity dynamics, despite a reduction, still require effective management as the company continues to invest in AICT and other strategic growth areas, which can influence financial stability.

Valuation

• The analysts have a consensus price target of ₩59391.667 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 ₩51400.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩28683.3 billion, earnings will come to ₩1740.0 billion, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of ₩47550.0, the analyst price target of ₩59391.67 is 19.9% 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.