SKM - SK Telecom: 3 Catalysts To Watch

2023-04-27 11:52:58 ET

Summary

• The first potential catalyst for SK Telecom is an improving growth outlook for the company with its entry into new fast-growing markets.
• SKM's second catalyst is the potential for a meaningful increase in shareholder capital returns thanks to new dividend income streams from SK Broadband and Hana Financial.
• The final catalyst relates to the possibility of SK Telecom taking share from its closest competitor, KT Corporation, which is still searching for a new CEO.
• I leave my Buy rating for SK Telecom unchanged considering the stock's multiple catalysts.

Elevator Pitch

I continue to rate SK Telecom Co.,Ltd's ( SKM ) [017670:KS] shares as a Buy.

My prior article for SK Telecom written on October 20, 2022 focused on the positive factors for SKM such as the stock's appealing valuations and the favorable profitability outlook for the company's wireless business.

I identify three potential catalysts for SKM in the current write-up, namely the expansion into new business areas, shareholder capital return improvement, market share gains in the mobile market. These catalysts support my bullish views and Buy rating for SKM.

New Growth Opportunities For SKM

UAM (Urban Air Mobility) and AI (Artificial Intelligence) have the potential to become new growth drivers for SK Telecom.

Details Of SK Telecom's Expansion Plans In The UAM Industry

The Korean UAM industry is a market with a very favorable growth outlook. There is huge demand for UAM services as evidenced by Morgan Stanley's ( MS ) forecasts. MS predicts that the worldwide UAM market could potentially expand by a 20-year CAGR of +31% to $1,470 billion by 2040. SK Telecom has set a goal of becoming "the first (company) to commercialize UAM in Korea in 2025" as indicated in its fiscal 2022 earnings presentation slides .

SKM is well-positioned to be the first mover in the fast growing UAM industry thanks to key partnerships. One key partnership is SK Telecom's exclusive agreement with leading US aviation company Joby Aviation ( JOBY ) on the provision of UAM aircraft. Separately, SKM has also obtained the buy-in from relevant government agencies. The company revealed at its Q4 2022 earnings call that it has been working on "demonstration projects" together with South Korea's "Ministry of Land, Transport and Infrastructure."

SK Telecom's Product And Service Offerings In The AI Space

With the rising interest in Generative AI and chatbots in recent months, it is worth noting that SK Telecom has already gained a head start in this area. At the company's Q4 2022 earnings briefing, SKM highlighted that it had introduced "the world's first GPT-3 model in Korean applied for B2C services" in May last year which was named "A Dot".

More significantly, SK Telecom is already looking into "various monetization business models" for the company's AI offerings as per management commentary at its most recent fourth quarter investor call. Specifically, SKM appears to be planning to create a "Super App" which brings together "A Dot" and the company's other products and services. As an example, SK Telecom's AI-driven Super App could offer its users recommendations that aid in the cross-selling of SKM's other media services.

In a nutshell, SK Telecom's new businesses such as AI and UAM allow the company to optimize its future revenue mix with a bias towards business areas which boast strong growth potential.

SK Telecom's Shareholder Capital Return

There is a reasonably high probability of SK Telecom distributing a higher amount of excess capital to the company's shareholders in 2023, as a result of two key factors.

The first key factor is that SK Telecom's broadband business arm SK Broadband initiated dividend payments for the first time this year for the FY 2022 period. Specifically, SK Telecom revealed at its Q4 2022 results call that it expects to receive around KRW150 billion in dividends from SK Broadband, and this is significant considering SKM's actual quarterly dividend payout of approximately KRW180 billion.

The second key factor is that SKM has swapped shares with Korean financial institution Hana Financial last year as part of a collaboration between the two companies. SK Telecom's 3% equity interest in Hana Financial means that also translates into additional dividend income for the company in the current year. Based on Hana Financial's KRW2,550 per share dividend payout for FY 2022, I estimate that SK Telecom could possibly earn as much as KRW22 billion of dividend income from its stake in Hana Financial.

The additional dividend income from SK Broadband and Hana Financial will provide SK Telecom with more excess capital that is available to be returned to its shareholders in the form of either dividends or share repurchases.

The Potential To Capitalize On Rival's Leadership Transition

SK Telecom's key competitor in the Korean mobile market, KT Corporation's ( KT ), saw its previous Chief Executive Officer or CEO Ku Hyeon-mo step down on March 28, 2023 . A recent April 4, 2023 news commentary published in telecommunications industry publication Light Reading highlighted that "the leadership vacuum (at KT) would last for most of the year" based on feedback from "industry insiders."

According to a January 9, 2023 Korean media Pulse news article , SKM is South Korea's largest mobile carrier with 39.9% market share, and KT is its closest rival with a 23.9% share. KT Corporation is currently operating with an acting CEO, and this situation could persist for months. Telecommunications is a highly competitive industry where management quality and attention play a huge role in winning over customers, so it is natural to assume that SK Telecom could possibly take advantage of KT's leadership transition to grab share from its key competitor.

Concluding Thoughts

I still award a Buy rating to SK Telecom. In my opinion, there are visible catalysts in place that could drive a positive re-rating of SKM's shares and valuations in time to come. SK Telecom's current valuations are undemanding with the stock trading at a low single-digit consensus forward EV/EBITDA valuation multiple.

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