Shrinking Market Will Squeeze Margins Despite AI Upside

Key Takeaways

• Demographic decline and limited international exposure threaten KT's revenue growth, exposing it to domestic competition and economic challenges.
  
• Regulatory pressures, disruptive competitors, and high capital expenditures are expected to compress margins and strain profitability.
  
• KT's AI-driven transformation, diversified growth, strong shareholder returns, and cost improvements position it for sustained profitability and resilience in high-growth digital markets.

Catalysts

Provides integrated telecommunications and platform services in South Korea, rest of Asia, and internationally.

• KT's addressable market is fundamentally shrinking due to South Korea's demographic decline, and this will likely lead to weaker long-term subscriber growth and stagnating revenues across core wireless, broadband, and media business lines.
  
• Persistent domestic market concentration and limited international exposure leave KT overexposed to South Korea's economic and population headwinds, increasing the risk that revenue growth will stagnate as competition intensifies and local demand fades.
  
• Growing pressure from disruptive new entrants such as MVNOs and global tech firms is expected to trigger more aggressive pricing and prolonged margin compression for KT, limiting the company's ability to sustain current profit levels.
  
• Escalating regulatory risks, including the potential for tighter price controls on telecom and IT services, threaten to restrict KT's pricing power and compress net margins as regulatory scrutiny increases on dominant incumbents.
  
• KT's capital-intensive commitment to ongoing network upgrades and large-scale security investments is likely to continue straining free cash flow and increasing depreciation costs, with uncertain returns on capital expenditure and a heightened risk of lower future earnings.

KT Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on KT compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming KT's revenue will decrease by 0.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.4% today to 5.2% in 3 years time.
• The bearish analysts expect earnings to reach ₩1425.1 billion (and earnings per share of ₩5571.14) by about August 2028, up from ₩928.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.6x on those 2028 earnings, down from 14.6x 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 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.83%, as per the Simply Wall St company report.

KT Future Earnings Per Share Growth

Risks

• KT's accelerating transformation into an AICT (AI and ICT) company, including the successful development of proprietary AI models, partnerships with global players like Microsoft and Palantir, and wins in large-scale public and enterprise AI platform projects, suggests strong long-term growth potential in the high-margin AI and digital services segment, supporting future revenue and operating profit growth.
  
• KT is executing substantial shareholder return programs such as a ₩1 trillion share buyback and an increased dividend policy, demonstrating strong confidence in cash flow sustainability, which is likely to enhance earnings per share and support the share price.
  
• The company's broad-based growth, with core segments (wireless, broadband, media, and B2B AI/IT services) all posting revenue increases, alongside significant outperformance in AI IT (up nearly 14 percent year over year) and cloud (up 23 percent year over year), indicates resilient top-line expansion and diversified revenue streams that can cushion against market headwinds and support consistent earnings.
  
• Profitability improvement efforts, such as effective labor cost management and completion of significant 5G network depreciation, will likely reduce cost pressures, improve net margins, and free up cash for reinvestment and shareholder rewards over the long term.
  
• Long-term industry trends, such as growing AI adoption, digitalization, the expansion of cloud and data center services, and ongoing investments in cybersecurity, position KT to tap into high-growth secular markets where it already demonstrates competitive advantages, enhancing both revenue potential and profitability well into the future.

Valuation

• The assumed bearish price target for KT is ₩51400.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of KT's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩105000.0, and the most bearish reporting a price target of just ₩51400.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩27609.7 billion, earnings will come to ₩1425.1 billion, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of ₩55700.0, the bearish analyst price target of ₩51400.0 is 8.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.