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On Wednesday, UBS initiated coverage on KT Corp (030200:KS) (NYSE: NYSE:KT) with a Buy rating and a KRW55,000.00 price target. The stock, currently trading at $17.25, has shown strong momentum with a 20% return over the past six months. According to InvestingPro analysis, KT Corp is currently trading below its Fair Value, suggesting potential upside opportunity. UBS’s analysis indicates that KT Corp is poised to outperform within the telecom sector, with expectations of leading operating profit (OP) growth from 2024 to 2026. The growth forecast is set at a compound annual growth rate (CAGR) of 17%, compared to the consensus estimate of 10%, excluding anticipated one-time labor costs of Won1 trillion in 2024.
KT Corp’s strong growth prospects are attributed to several factors. The company is projected to experience robust growth in its artificial intelligence (AI) business, with a CAGR of 23%. Additionally, a reduction in labor costs is expected following a voluntary retirement scheme in the fourth quarter of 2024, which should result in annual savings of Won300 billion. Furthermore, UBS anticipates stabilizing marketing and depreciation and amortization (D&A) costs for KT Corp.
Despite potential concerns over regulatory risks, UBS forecasts stable revenue growth in KT Corp’s telecom business at a CAGR of 1%, with minimal downside risk to average revenue per user (ARPU). The firm’s return on equity (ROE) is projected to reach 9.6% by 2026, which could trigger a positive re-rating of the stock. UBS expects the stock’s enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiple to increase from 3.0x in 2026 to 3.4x.
The UBS analyst’s commentary underscores the rationale behind the optimistic outlook for KT Corp. "We initiate coverage on KT with a Buy rating and a price target of Won55,000. KT is our top pick in the telecoms sector, as we expect it to deliver sector-leading OP growth in 2024-26E, at 17% CAGR versus consensus of 10%, excluding one-time labour costs of Won1trn in 2024," said the UBS analyst. The growth is expected to be mainly driven by the AI business, labor cost reductions, and stabilized marketing and D&A costs.
In summary, UBS’s initiation of KT Corp with a Buy rating and a KRW55,000.00 price target reflects their confidence in the company’s strategic initiatives and growth potential within the telecom industry. The company has maintained dividend payments for 11 consecutive years, currently offering a 4.3% yield. This coverage provides investors with a positive outlook on KT Corp’s future financial performance and market positioning. For a deeper understanding of KT Corp’s valuation and growth prospects, investors can access the comprehensive Pro Research Report available on InvestingPro, which includes additional insights and detailed financial analysis.
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