Urgent Change Needed at KT: "Must Cut Marketing and Labor Costs and Show New CEO Leadership"

2019 4Q Operating Profit 83 Billion KRW... Half of Market Expectations
5G 'First Year' This Year, Urgent Need for Performance Improvement
Quarterly 700 Billion KRW Marketing Cost is a Challenge... New CEO Leadership Also Crucial

[Asia Economy Reporter Minwoo Lee] As the 5G era officially begins, KT's transformation is urgently needed. Attention is focused on whether the company can leap forward by reducing unnecessary marketing and labor costs under the strategy of the new CEO.

On the 25th, NH Investment & Securities maintained a 'Buy' rating on KT but lowered the target price from 35,000 KRW to 33,000 KRW. This was due to the fourth-quarter results last year significantly missing both previous estimates and market expectations. KT's estimated Q4 revenue last year was 6.28 trillion KRW, with an operating profit of 83 billion KRW. Revenue increased by 4.8% compared to the same period last year, but operating profit decreased by 13.3%. In particular, operating profit fell far short of the previous estimate of 122.3 billion KRW and the market expectation of 167.3 billion KRW. This was analyzed to be due to high seasonal and marketing costs in Q4. Marketing expenses exceeding 700 billion KRW per quarter are also expected this year.

However, some positive aspects were found. Wireless revenue reached 1.7 trillion KRW, up 0.5% year-on-year. It is expected to return to growth after eight quarters since Q4 2017. Considering the temporary revenue decline due to changes in accounting standards related to membership points revenue recognition, the growth trend is analyzed to be even steeper. The average revenue per user (ARPU) in Q4 also rose 1.8% year-on-year to 32,030 KRW. A return to profitability is expected after 14 quarters.

Securing 5G subscribers is also a positive factor. The number of subscribers is estimated at 1.46 million, achieving a market share of 30.4% and a penetration rate of 6.6%. Since September last year, there has been little change in the market share among the three telecom companies, indicating that competition has entered a stabilization phase.

NH Investment & Securities expects the profit and loss improvement effect from 5G to appear starting from the first quarter of this year. The expected revenue for this year is 25.875 trillion KRW, a 5.9% increase from last year, and operating profit is forecasted to rise 13.2% to 1.229 trillion KRW. Jaemin Ahn, a researcher at NH Investment & Securities, said, "New CEO Koo Hyun-mo, who oversaw both wired and wireless businesses until last year and has a deep understanding of the overall business, will lead the changes investors want, such as improving wireless business profitability and growing the media business." He added, "A natural workforce reduction of about 1,000 people is expected over the next 10 years, which will quickly reduce labor cost burdens, and the new CEO's future strategy will be disclosed next month."