What is the stock?
Korean telco operator, KT Corporation (KRX: 030200).
[1]What do you like about it?
The global telecommunication sector has de-rated, relative to historical multiples, and is today close to 1.5 standard deviations ‘cheap’. We have identified that there are opportunities in markets such as Korea, with telco stocks such as the ex-government owned operator, KT Corporation (KT).
KT’s fixed line broadband internet can serve every apartment building in South Korea, a country of 50 million people, with one gigabyte per second internet speeds. That speed is 10 times faster than the fastest service available on the Australian NBN and 40 times faster than what most NBN customers receive.
How is it better than its competitors?
KT’s 27.6% 2016 dividend payout ratio is well below regional telecommunications companies’ best practice, and below the capacity of KT to distribute income. We believe KT’s valuation discount to its peer group could be closed via a more progressive dividend policy, with little cost to the net financial risk of the group.
KT is entering a period where capital expenditures will trend structurally lower than annual depreciation and growth in free cash flow should accelerate. It has also become one of the cheapest telecommunications stocks globally, with an enterprise value (EV) to sales multiple of 0.6 times and EV to EBITDA of 2.6 times (half the multiple of the Asian peer group) but, more importantly, it is also trading on a highly attractive EV to free cash flow yield of approximately 15%.
Where do you see the value?
In a world of low yields, a higher dividend can result in outsized share price appreciation. If KT were to raise its payout ratio to 50% (from the current level of 28%), the shares should command a valuation of around 5-6 times EBITDA.
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