● 3Q review: Operating profit meets our estimates
KT`s 3Q operating profit came in line with our estimate and slightly above the market consensus.
Positives: Services revenue increased 3% YoY, aided by a 2% rise in wireless services. Wireless ARPU stayed flat YoY, but the subscriber base expanded more rapidly than we anticipated. Media/content revenue jumped 15% YoY, beating our expectations, thanks to robust VOD revenue (pay-per-view, etc.) during the Chuseok holidays. Revenue expansion combined with cost reductions resulted in double-digit growth in operating profit (+17% YoY) and net profit (+86% YoY).
Negatives: Meanwhile, fixed-line service revenue disappointed, with revenue (-2% YoY) declining at a faster pace than in the previous quarter (-1% YoY). We are seeing a steady fall in subscriber numbers/traffic on the public switched telephone network (PSTN), as users continue to migrate to wireless services. However, shrinking PSTN revenue is being offset by growing gigabit internet and IPTV revenues.
● Increasing earnings visibility vs. management uncertainty
KT has had the strongest earnings visibility among telcos so far this year. Its wireless subscriber net addition target for the year was achieved ahead of schedule, in 3Q, and gigabit internet and IPTV businesses are offsetting the PSTN weakness. Since its years-long efforts to improve business efficiency (subsidiaries and assets) came to an end last year, non-operating expenses have declined and financial position has strengthened, allowing its net profit to climb.
On the other hand, we foresee uncertainties growing next year regarding management and telecom regulations. 1) CEO Chang-gyu Hwang`s term will expire at a shareholders` meeting in early 2017. The company`s keynote and dividend policies tend to hinge on the management, and the company tends to incur one-off expenses related to restructuring and subsidiaries in the first year of a new CEO. 2) Next year`s presidential election could result in downward pressures on telecom service expenses. Also, the subsidy celling required by the Mobile Communications Terminal Distribution Structure Improvement Act (MCTDSIA) is set to expire in October 2017. Thus, telecom stocks overall may see rising concerns next year.
● Retain Buy with TP of W40,000
We keep our Buy rating with a target price of W40,000. Earnings have improved steadily, and 2016F dividend yield (2.5%) is higher than the three-year KTB yield.
The company`s fundamentals (e.g., sales power, human resources, and financial structure) have improved substantially. Thus, we believe that the stock will perform solidly next year even amid changes in management and regulations.
By Moon Jee-hyun, Analyst at Mirae Asset Daewoo Securities
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