Via SeekingAlpha.com

Elevator Pitch

I maintain my “Bullish” rating on Korean telecommunications service provider SK Telecom Co., Ltd.’s (NYSE:SKM) [017670:KS].

This is an update of my prior article on SK Telecom published on Feburary 13, 2020. SK Telecom’s share price has declined by -6% from KRW226,500 as of February 12, 2020 to KRW212,000 as of May 25, 2020 since my last update. SK Telecom trades at 5.7 times trailing twelve months’ EV/EBITDA and 4.7 times consensus forward next twelve months’ EV/EBITDA. SK Telecom offers a historical FY2019 dividend yield of 4.7% and a consensus forward FY2020 dividend yield of 4.8%. There could be further upside to SK Telecom’s future dividend payout, as the company is reviewing its dividend policy from the perspective of improving shareholder return.

SK Telecom’s plans to list its non-mobile businesses have been delayed due to the coronavirus pandemic. But it is just a matter of time before the value of the company’s non-mobile businesses is unlocked eventually, as SK Telecom has clearly stated its intentions to push for the IPO of a number of the company’s non-mobile businesses.

My updated sum-of-the-parts valuation of KRW298,669 implies a 41% upside from SK Telecom’s share price of KRW212,000 as of May 25, 2020. Positive changes such as an increase in the company’s dividend payout and the listing of the company’s non-mobile businesses will help to narrow and eventually remove the conglomerate discount assigned to the stock.

Readers have the option of trading in SK Telecom shares listed either on the New York Stock Exchange with the ticker SKM, or on the Korea Exchange with the ticker 017670:KS. For SK Telecom shares listed as ADRs on the New York Stock Exchange, average daily trading value for the past three months is decent at approximately $9 million, but it is relatively lower compared to shares listed in Korea.

For SK Telecom shares listed in Korea, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Korea Exchange is one of the major stock exchanges that is internationally recognized and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $60 million and market capitalization is above $12.4 billion, which is comparable to the majority of stocks traded on the US stock exchanges. Institutional investors who own SK Telecom shares listed in Korea include Causeway Capital Management, Macquarie Investment Management, Samsung Asset Management and BlackRock Institutional Trust Company among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage, such as Interactive Brokers, Fidelity, or Charles Schwab, or local brokers operating in their respective domestic markets.

READ ALSO  Wall Street Begins Hedging: JPM Says Trump Victory Is "Most Favorable Outcome", Would Push S&P To 3,900

Potential Revision Of Dividend Policy Could Be A Positive Re-rating Catalyst For The Stock

SK Telecom offers a historical FY2019 dividend yield of 4.7% and a consensus forward FY2020 dividend yield of 4.8%.

The market has relatively low expectations of SK Telecom’s future dividend growth. Market consensus expects SK Telecom to grow its dividends per share by +1.0% YoY and +1.5% YoY to KRW10,096 and KRW10,247 in FY2020 and FY2021, respectively. Any upside surprise for SK Telecom’s dividend payout in future could be a positive re-rating catalyst for the stock.

At the company’s 1Q2020 earnings call on May 9, 2020, SK Telecom noted that “if we were to opt for a different payout or dividend policy, I can say that it will gear toward a direction where the overall shareholder return volume will be greater than that of now.”

Apart from the possibility of increased dividends going forward, SK Telecom is also considering other options for returning excess capital to shareholders. The company highlighted on its 1Q2020 earnings call on May 9, 2020, that “our stock prices are extremely undervalued” and “we are reviewing all possible options, which include share buyback.”

The potential revision of SK Telecom’s capital return policy to derive greater value for minority shareholders will be seen as a sign of improved corporate governance, and should help to partly narrow any conglomerate discount assigned to the stock.

Potential Delay In The Listing Of Non-Mobile Businesses

The unlocking of the value of SK Telecom’s non-mobile businesses is another key re-rating catalyst for the stock.

Earlier, SK Telecom disclosed at its FY2019 earnings call on February 7, 2020, that the company has put in place a dual operating system for its core Mobile Network Operator or MNO business and its other non-mobile businesses. The company has also identified certain non-mobile businesses such as 11st, wave and SK Broadband as potential IPO candidates that it could potentially spin-off in due course. These suggest that SK Telecom has the intention of eventually unlocking the value of its non-mobile businesses.

Notably, “the IPO of SK Broadband, an affiliate of SK Telecom, will also be delayed by about another year” as reported by The Korea Times. As a result of volatile capital market conditions brought about by the coronavirus pandemic, SK Telecom’s plans to list its non-mobile businesses are likely to be delayed for a period of time. But it is more of a case of “when” rather than “if”.

READ ALSO  Shanghai foreign trade grows strongly in September

More importantly, SK Telecom’s key non-mobile businesses continued to perform relatively well in 1Q2020 in spite of the coronavirus pandemic.

SK Telecom’s e-commerce platform company 11st, saw a +9% YoY growth in Gross Merchandise Value or GMV in 1Q2020, which it attributed to a “over 30% (growth) for food/necessary goods” as more people in Korea stayed at home for longer periods of time due to the coronavirus pandemic. Further, Korea’s largest retailer e-mart has recently joined the 11st platform on April 24, 2020, and the addition of e-mart’s products to its portfolio should strengthen the 11st platform’s status as a go-to destination for online shoppers.

The company’s OTT (Over-The-Top) media platform company wavve saw its subscriber numbers drop slightly from 2.7 million at the end of last year to 2.5 million in February this year. SK Telecom acknowledged at the recent 1Q2020 earnings call that was due to the “discontinuation of certain contents we did see a temporary stag in Wavve.” Nevertheless, the coronavirus pandemic is likely to accelerate the growth in OTT subscriptions in Korea, and wavve, formed from a merger between SK Telecom’s OTT platform “oksusu” and the OTT platform of Korea’s three major TV broadcasters (SBS, MBC, KBS) called “POOQ”, should be a key beneficiary. Going forward, wavve aims to further expand its content library to 4,000 titles, from 3,300 titles currently which already almost tripled from 1,200 titles last year.

The merger of SK Telecom’s broadband business, SK Broadband and Taekwang Industrial’s cable TV subsidiary, T-broad was completed in April 2020. The merged entity has 6.48 million broadband subscribers and 8.21 million pay television subscribers. Prior to the merger, SK Broadband’s revenue grew +8.2% YoY and +0.3% QoQ to KRW823.5 billion for 1Q2020, and SK Telecom expects the merged entity to achieve KRW4 trillion in revenue for full-year FY2020.

Valuation

SK Telecom trades at 5.7 times trailing twelve months’ EV/EBITDA and 4.7 times consensus forward next twelve months’ EV/EBITDA based on its share price of KRW212,000 as of May 25, 2020. As a comparison, the stock’s historical five-year and 10-year mean consensus forward next twelve months’ EV/EBITDA multiples were 4.9 times and 4.5 times, respectively.

READ ALSO  Canada's Cenovus to buy Husky for $2.9 billion as pandemic drives oil mergers

I have updated my sum-of-the-parts valuation as per my prior article published on February 13, 2020, to reflect the changes in SK Hynix’s (OTC:HXSCF) (OTC:HXSCL) [000660:KS] market capitalization and the net debt figure for SK Telecom.

My updated sum-of-the-parts valuation of KRW298,669 implies a 41% upside from SK Telecom’s share price of KRW212,000 as of May 25, 2020. I have not assigned any conglomerate discount to SK Telecom, based on the assumption that SK Telecom’s mobile and non-mobile businesses will be separated with individual businesses and subsidiaries either spun off or listed to unlock value.

Updated Sum-Of-The-Parts Valuation For SK Telecom

SK Telecom’s Key Businesses Value Of Proportionate Stake (KRW trillion) Value Per Share (KRW) Assumptions
Mobile Business 17.0 210,537 10 times estimated normalized operating income of KRW1.7 trillion
11st (80.3% stake) 2.2 27,246 Valuation based on private equity fund’s acquisition
ADT Caps (55% stake) 0.7 8,694 SK Telecom’s acquisition of ADT Caps in 2018
wavve (30% stake) 0.3 3,715 Valuation based on the convertible bond deal
Merged broadband business (74.4% stake) 2.6 32,200 10 times estimated combined operating income
SK Hynix (20.1% stake) 11.2 138,598 Market price
Net Debt (as of end-1Q2020) -9.9 -122,322
Total 298,669

Source: Author

Risk Factors

The key risk factors for SK Telecom include a cut in dividends in the future, and a failure to unlock the value of the company’s non-mobile businesses.

Asia Value & Moat Stocks is a research service for value investors seeking value stocks with a huge gap between price and intrinsic value, leaning towards deep value balance sheet bargains (i.e. buying assets at a discount e.g. net cash stocks, net-nets, low P/B stocks, sum-of-the-parts discounts) and wide moat stocks (i.e. buying earnings power at a discount in great companies like “Magic Formula” stocks, high-quality businesses, hidden champions and wide moat compounders). Sign up here to get started today!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.