Fitch Ratings has assigned KT Corporation's (A/Stable) proposed US dollar senior unsecured notes an 'A' rating.

KT will use the net proceeds to refinance its existing debt and for general corporate purposes.

The proposed notes are rated at the same level as KT's senior unsecured rating, as they represent its direct, unconditional, unsecured and unsubordinated obligations.

KT's ratings and the Stable Outlook are supported by the company's strong market position in South Korea's oligopolistic telecom market, well-established network infrastructure and low leverage. We expect the increasing use of 5G in the country and measured capex to continue to support KT's conservative balance sheet and strong financial flexibility over the medium term.

Key Rating Drivers

Improving Wireless on 5G Growth: Fitch expects KT's positive momentum to continue in the short term as increasing 5G penetration and growing data consumption by subscribers support its wireless segment. Higher average revenue per user (ARPU) will be achieved mainly through the sale of 5G tariff plans as 5G subscribers accounted for 50% of its total handset subscribers at end-March 2022. KT expects 5G subscribers to continue rising to form 60% of its handset subscribers by end-2022.

Strengthening Media Platform: We forecast the contribution from media segments - internet protocol television (IPTV) and content - to continue to rise, providing strong growth to KT's revenue. KT restructured its media group to cover the entire value chain, enabling production and distribution of media content. The company seeks to develop content efficiently to distribute via various platforms such as IPTV, cable TV, satellite broadcasting and over-the-top (OTT) services.

Solidifying Leading Position in Pay-TV: KT expects its pay-TV segment to expand robustly, taking advantage of its large subscriber base in fixed-line broadband and extensive network infrastructure. The acquisition of a cable TV company, Hyundai HCN Co., Ltd, solidified KT's position with a 36% share of subscribers at end-March 2022, way ahead of both SK Telecom Co., Ltd (SKT, A-/Stable) and LG Uplus Co., Ltd, which have 25% each. We forecast revenue from the media segment to rise by a double-digit percentage in the short term.

Moderate Capex: We estimate 2022 capex to be similar to that in 2021 as a small reduction in capex for network upgrades is likely to be offset by investment in other areas, such as internet data centres, real estate and media content. In addition, 5G capex will not significantly decrease, but remain high over the medium term, as investments to upgrade to 5G may be extended to ensure coverage and sufficient capacity required to boost user experience and motivate the adoption of premium OTT services.

Conservative Balance Sheet Maintained: Fitch expects KT's debt to rise moderately this year because of acquisitions. However, KT's capital spending can be covered by its sizeable operating cash flow and large holdings of cash and short-term investments. We expect net leverage to increase to 1.2x in 2022 (2021: 1.0x) on high capex and payment of around KRW600 billion-700 billion for equity investments. However, management continues to focus on maintaining a healthy balance sheet and a prudent financial policy.

Derivation Summary

KT's market position is strong, especially in fixed-line operations, where its market share is around 63% of subscribers. Leverage is generally better than that of similarly rated Asia-Pacific peers, such as Singapore Telecommunications Limited (A/Stable, Standalone Credit Profile: a-), due to management's focus on maintaining a conservative balance sheet.

We expect KT's FFO net leverage to stay healthy, at around 1.0x-1.2x over the medium term, lower than its closest peer SKT's 1.6x-1.7x. However, its operating margin is lower than that of peers due to higher marketing costs, a less favourable regulatory environment, declining use of fixed-line telephony and discounts on its wireless services. KT's consolidated operating margin also includes BC Card, which has a lower margin than the core telecom operations.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Revenue to increase by 4%-5% in 2022, reflecting the continued positive impact of the 5G rollout on the wireless operation and continued strong growth in the IPTV and media businesses. Inclusion of Hyundai HCN's full-year financials will also support revenue growth in 2022.

Improvement in EBITDA margin in 2022 (2021: 18%) on the back of well-controlled marketing costs and improving ARPU.

Capex to stay elevated at around KRW4.2 trillion on a cash basis in 2022 (2021: KRW4.2 trillion).

Increase in dividend payouts as per company guidance

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive rating action is unlikely in the medium term due to the competitive market environment and our expectations for the company's investment and shareholder returns.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

FFO net leverage sustained above 1.5x (2021: 1.0x)

Sustained negative pre-dividend free cash flow

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Robust Liquidity: KT had cash, cash equivalents and short-term investments of KRW3.3 trillion, including cash on hand of KRW2.6 trillion, at end-March 2022, which is the amount the company consistently preserves. This was sufficient to cover short-term debt of KRW1.6 trillion. KT has ready access to overseas and local capital markets for external financing. It also held KRW1.4 trillion in unused credit facilities from various financial institutions at end-2021.

Issuer Profile

KT is Korea's largest provider of integrated telecommunications services by revenue. It is the largest fixed-line and broadband operator and holds the second-largest market share in the wireless market.

Date of Relevant Committee

07 December 2021

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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