KT Corp (ADR) (NYSE:KT), a South Korea-based telecommunications service provider, did not do well for Mittleman Brothers in the third quarter, dropping 17% from $16.64 to $13.87. In its Q3 investor letter (you can download a copy here), the hedge fund said that the main reason for the stock price drop was a change in government regulation on the maximum tariff the mobile telecom service providers. Yet the investor is optimistic about the company, saying in the letter that it expects a 73% upside from the quarter-end price of $13.87 to its estimate of $24. Let’s take a look at comments made by Mittleman Brothers in its latest investor letter.
KT Corp. was our second most impactful detractor from our performance in Q3. This company is somewhat like the Verizon of South Korea in terms of core business lines. KT is the #1 broadband provider in South Korea, with 1-Gigabit speed, and the #2 player in cell phone service (31% market share), along with a collection of smaller businesses.
The reason for the current stock price drop was due to a change in government regulation on the maximum tariff the mobile telecom service providers can charge their new customers. The stock price drop seems overdone, as this one time hit to earnings (maybe a 7% reduction) won’t be recurring anew each year, it just lowers the base a bit, from which the business should still grow nicely.
KT, in partnership with Intel, among others, will launch the first 5G trial at the PyeongChang Winter Olympics in Feb. 2018. They are also working on systems for driverless cars. The company has been selling non-core assets over the past few years to reduce debt, and they still have some valuable commercial real estate yet to be sold. But they have largely succeeded in cutting costs, reducing leveraging, and EBITDA and FCF are growing again.
The stock is obscenely cheap, and we see a minimum of 73% upside from the quarter-end price of $13.87 to our estimate of fair value at $24, which is targeting only an EV/EBITDA multiple of 4x ($4.45B consensus estimate for 2018) and a P/FCF multiple of 10.4x ($1.2B est. for 2018).
Verizon (VZ $49.49) trades at 7x EBITDA and 13.5x FCF, and likely will not grow as fast as KT going forward given that KT is centered in a faster growing part of the world. Obviously if war breaks out with North Korea this stock might not do very well for at least some time, but given China’s immense leverage over North Korea, and their presumed interest in not seeing one of their largest trade partners reduced to ashes, we think China will intervene in NK if needed to prevent that nightmare scenario from becoming reality.
If Xi Jinping cannot project power effectively in China’s own backyard, over what is essentially a client-state, it would be well beyond humiliating and possibly devastating to his regime. So operating under this assumption, we are not expecting a restart of the Korean War, as China simply has too much to lose. That said, the guns of August 1914 utterly defied rational self-interest, so we are monitoring that situation closely and understand that our underlying premise of no war on the Korean peninsula could be wrong.
KT Corp (ADR) (NYSE:KT), formerly Korea Telecom, is a $7-billion market cap telecommunications service provider in South Korea. The company dominates the local landline and broadband Internet market, serving about 90% of South Korea’s fixed-line subscribers and 45% of high-speed Internet users.
For the third quarter of 2017, KT reported operating revenue of 5,827 billion Korean Won (KRW), up 5.4% compared to 5,530 billion KRW in the prior year’s same quarter. Its net income for the quarter was 203 billion KRW, down 13.6% compared to 235 billion KRW in 2016. EBITDA was down 1.7% year-over-year to 1,215 billion KRW. (1 South Korean Won KRW = 0.000911002 USD).
KT Corp (ADR) (NYSE:KT) shares are up 1.20% this year. The stock, however, is down around 6% over the period of the last 12 months. KT, currently trading at around $14, has a consensus average target price of $16.55 from 28 analysts polled by FactSet. The consensus average recommendation on the stock is Overweight.
KT Corp (ADR) (NYSE:KT) is a favorite stock among the hedge funds covered Insider Monkey. Segantii Capital boosted its stake in the company more than 400% in the third quarter, while Kopernik Global Investors, another fund tracked by us, upped its position in KT by over 70% in the third quarter.