KT Earnings: Underlying Profit in Line; Valuation Up to USD 18.00 From USD 17.20 on Currency

We increase our fair value estimate for KT to USD 18 per ADR following its third-quarter 2023 result, which was in line with our estimates on an underlying basis, despite the poor headline profit. Third-quarter service revenue increased by 3.7% year on year with reported operating income declining by 29% year on year. However, this decline in operating income was largely due to wage negotiations concluded earlier in 2023 than 2022, resulting in around KRW 140 billion of costs that were included in fourth-quarter 2022 also being included in third-quarter 2023. There were also approximately KRW 50 billion of "content smoothing costs" included this quarter. These should normalize in the fourth quarter and excluding the impact of these, third-quarter operating profit would have increased by around 13.1%, despite KT being hit by the same rising energy costs that caused competitor LG U+ to report a decline in operating profit.