OREANDA-NEWS. Fitch Ratings has affirmed South-Korea-based KT Corporation's (KT) Long-Term Foreign and Local-Currency Issuer Default Ratings (IDRs) as well as its senior unsecured rating at 'A-'. The Outlook is Stable.

KT's ratings and Stable Outlook reflects Fitch's view that the company's operations and credit metrics are likely to improve from 2015 despite breaching our negative rating guidance metrics on a one off basis in 2014. Higher margins, due to lower marketing and selling, general and administrative (SG&A) costs, controlled capex and additional cash inflow from sales of financial subsidiaries will lead to improved credit metrics.

KEY RATING DRIVERS

Profitability Rebounds: Fitch Ratings expects KT's margin to improve in the short term with the benefit of lower marketing and SG&A costs after restructuring. Contraction in fixed-line voice revenue is likely to be offset by solid growth in wireless and IPTV. KT's core-telecom EBITDA margins (as a percentage of service revenue) for 2015, will increase to 27.4% (2014:18.1%). This is a substantial improvement from a poor 2014, which was affected by intense competition and large one-off labour costs.

Leverage Improves: Fitch expects KT to improve its leverage in 2015 with higher operating cash flows, lower capex and dividend payments. Repayment of debt using the proceeds from sales of its stakes in financial subsidiaries - KT Rental and KT Capital, will also help strengthen its balance sheet. We expect core-telecom leverage to come down below 2.0x in the short term. (2014:3.2x)

Rising Mobile ARPU: Fitch forecasts that KT's mobile average revenue per user (ARPU) will continue to rise over the short term as it increases its long-term evolution (LTE) subscriber base. ARPU improved to KRW34,879/month in 2Q15 (2Q14: KRW33,619). LTE subscribers formed 67.6% of the company's mobile customers at 1H15 and Fitch forecasts this proportion to increase close to 70% by end-2015. However, the speed of rising ARPU may slow down as LTE penetration rate is already high.

Fixed-Line Revenue Contraction: Fitch expects KT's broadband as well as fixed-line voice revenue and ARPU to continue declining over the medium term. This is because subscriber growth will remain marginal as the market becomes increasingly saturated amid intense competition. In addition, price discounts from bundling and migration to a cheaper voice-over-internet-protocol (VoIP) service will erode profitability. This trend is unlikely to reverse.

Easing Competition: Fitch believes that the regulator's close watch to prevent price competition from overheating will continue for the short term. Implementation of the Handset Distribution Act was successful in lowering the competition between major telecom operators. Mobile number porting which is an effective indicator of wireless competition has substantially decreased by 40% over October 2014 to July 2015, in comparison to the same period before the bill was enacted.

KEY ASSUMPTIONS

- Core-telecom revenue to increase slightly in 2015 with higher wireless ARPU
- Core-telecom EBIT margin to improve due to lower marketing costs and substantial reduction in SG&A expenses after restructuring in 2014
- Capex to fall below KRW3trn (cash basis) as guided by the company
- Free cash flow to remain slightly positive in 2015 and 2016

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
Core-telecom net debt/operating EBITDAR above 2x;
Core-telecom net debt/operating EBITDAR (including handset receivables securitization) above 3.0x;
Core-telecom operating EBITDAR margin below 25%; and
Sustained negative pre-dividend free cash flow.

Positive:
Given the company's difficult market environment, positive rating actions are unlikely in the medium term.