SKM - SK Telecom: Watch Share Repurchases And Metaverse Business

2023-07-10 15:19:48 ET

Summary

• SK Telecom has disclosed its intention to implement a new share buyback plan in the near term, and this could be a timely move considering SKM's depressed valuations.
• SKM's metaverse platform, ifland, has the potential to be a major growth driver for the company in the long run, considering specific corporate and industry metrics.
• I retain my Buy rating for SK Telecom, taking into account potential catalysts like share repurchases and the faster-than-expected growth of its metaverse business.

Elevator Pitch

My investment rating for SK Telecom Co., Ltd's ( SKM ) [017670:KS] stock is a Buy. I previously highlighted a number of re-rating catalysts for SKM in my earlier April 27, 2023 write-up .

With this latest update, I touch on SK Telecom's potential share repurchases and its metaverse platform, which I deem to be key factors that might drive up SKM's stock price. SK Telecom's shares remain undervalued, and I think that SKM continues to justify a Buy rating.

Eyes On Potential Share Repurchases

At its most recent quarterly earnings call for the first quarter of this year, SK Telecom mentioned that it has "in mind a potential share buyback program going forward", considering that its "stock price is rather undervalued."

Based on valuation data sourced from S&P Capital IQ , the market is now valuing SK Telecom at consensus forward next twelve months' price-to-sales or P/S, EV/EBITDA, and normalized P/E ratios of 0.53 times, 3.6 times, and 8.4 times, respectively.

SKM's trailing twelve months' dividend yield is an appealing +7.5%. Notably, the company also guided at its first quarter results call that its "annual dividend payout size (for FY 2023) is going to be similar to the previous year (FY 2022)."

It is pretty reasonable to assume that SK Telecom will enhance shareholder value by buying back the company's shares at current price levels, taking into account its valuation multiples and dividend yield.

SK Telecom is expected to release its Q2 2023 financial results in early August (Source: S&P Capital IQ estimates). Assuming that SKM announces a share repurchase plan that is of a meaningful amount in August, this could serve as a short-term catalyst for the stock.

More importantly, it is encouraging to know that SKM holds a long-term view with regard to shareholder capital return. SKM highlighted at its Q1 2023 earnings briefing that it aims to "create more sustainable shareholder returns" and focus on "increasing the corporate value in the medium to long term" with its new capital return initiatives including share buybacks.

In my opinion, I think it is highly probable that SK Telecom chooses to go with a recurring share buyback program to complement its dividend distributions. In contrast, one-off share repurchases might not be viewed favorably by investors who have a strong emphasis on recurring and sustainable shareholder capital returns as part of their investment criterion.

In summary, I have a positive view of SK Telecom's potential shareholder capital return moves. In the short term, SKM could potentially disclose a new share buyback program in the coming months, which might turn out to be a key near-term share price driver for the stock. In the long run, there is a good chance that SKM optimizes its shareholder capital return strategy to boost investors' confidence with shareholder-friendly initiatives like a recurring share repurchase plan.

Metaverse Platform In The Spotlight

On the company's corporate website , SK Telecom lists metaverse as one of the key services provided by the company, alongside MNO (Mobile Network Operator), subscription, AI, and digital infrastructure.

SKM noted at its Q1 results briefing that it has a "metaverse-type social media platform centered on 3D virtual spaces" known as ifland. According to recent media articles, SKM's ifland has been utilized for organizing "lectures, business forums, and concerts" and creating "virtual homes" .

There are three key reasons to be encouraged about the future growth of SK Telecom's metaverse platform, ifland.

Firstly, SK Telecom is well-positioned to achieve success with the ifland metaverse platform in its home market, South Korea. As per the results of consulting firm Analysys Mason's consumer survey , South Koreans "have a greater interest in the use of AR/VR services than those in other developed markets." This implies that SKM's metaverse platform and related services are more likely to gain acceptance with its domestic consumers.

Secondly, SKM has already managed to successfully expand ifland's presence in many foreign markets outside of South Korea, which acts as a strong validation of ifland's value proposition. As revealed by SK Telecom at its first quarter results call, the ifland platform is now available in almost 50 countries around the world, and international users account for over 10% of ifland's monthly active user base in Q1 2023.

Thirdly, SK Telecom has plans in place to make money from the ifland platform. SKM intends to launch a marketplace on ifland in 2H 2023 to start charging for transactions executed on its metaverse platform, as per the company's management commentary at the most recent quarterly earnings briefing.

In a nutshell, SKM's metaverse business doesn't get much attention from investors unlike its core telecommunication services unit, but ifland has the potential to be a meaningful contributor to SK Telecom's financials in the long term.

Closing Thoughts

A review of SK Telecom's key valuation metrics implies that the stock is still undervalued. A new share buyback plan and favorable developments relating to its metaverse business are the key potential re-rating catalysts, which support a Buy rating for SKM.

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