Moody's: Korea Telecom's Plan to Reduce Dividend is Credit Positive
Published on: 2nd Dec 2013
By: Ian Mansfield
Moody's Investors Services says Korea Telecom's (KT) plan to decrease its dividend payment is credit positive as it will help secure more funds for the reduction of debt in 2014 although the potential positive impact on its financial leverage will be limited.
On 29 November 2013, KT announced its intention to revise its dividend policy on the basis that it is difficult to maintain such a payout in the light of recent operating performance. KT had originally announced its payment of at least KRW2,000 per share, or KRW488 billion in total. However, it now expects its payment for 2013 -- which will be paid in Q2 2014 -- to be lower than its original plan. The amount will be decided at the shareholders meeting in March 2014.
As indicated, Moody's considers that the potential decrease of KT's dividend payments will help improve its free cash flows.
For example, the ratings agency estimates that the potential reduction of dividend payments could help the company improve its free cash flow (FCF)/debt by approximately 2 to 3 percentage points.
Moody's had originally expected its adjusted FCF/debt to improve to high-single digit percentage in 2014, from 0%-5% in 2013 due to the reduction of capex. However, the expected decrease of dividend payments could help the company improve the ratio to approximately 10%.
Nevertheless, the potential positive impact on leverage -- as measured by adjusted debt/EBITDA -- should be limited. For example, the original dividend payments would have been equivalent to approximately 4% of its total debt as of September 2013.
In the light of such weak operating results, plans to reduce the dividend and manage capex down are credit positive and are indicative of management's commitment to delever the business. However, such initiatives will only have limited impact absent a sustained and material recovery in KT's fundamental performance.
Moody's remains concerned about the weak recovery in KT's earnings due to intense competition and declines in revenue, especially fixed-line voice, as well as the slow progress of its deleveraging efforts, especially through non-core asset sales.
As such, the ratings could be downgraded in the next two quarters, if the company fails to improve earnings and reduce debt in a timely manner.