Boasting a Wide Variety of Growth Engines

The author is an analyst of Shinhan Investment Corp. He can be reached at mj1224@shinhan.com. -- Ed.

 

Initiate coverage with BUY and target price of KRW295,000

We initiate our coverage of SK Telecom with BUY for a target price of KRW295,000, with a target EV/EBITDA of 4.3x (15% discount to the average EV/EBITDA seen during the LTE era) applied for the valuation of operations and the value of the company's 20.07% stake in SK Hynix added at a 30% discount. The valuation discount is attributable to: 1) slightly lower market share in 5G services vs. total market share; and 2) slower penetration rate than in the past.

However, the discount applied to SK Telecom will likely decline going forward on ARPU improvement from the shift to 5G, decrease in marketing competition, and favorable changes in the regulatory environment. Upon confirmation of earnings improvement, removal of the discount placed on valuations will lead to upward revision in target price.

Strengthening competitiveness of subsidiaries

In addition to its mobile operations, SK Telecom boasts a wide variety of growth engines. SK Broadband’s IPTV services are on a clear growth track, with net subscriber additions reaching 5.19mn as of 4Q19 and the portion of premium UHD services approaching 65.2%. Completion of the merger of T-broad at end-April should drive additional growth in earnings going forward.

Meanwhile, over-the-top service platform Wavve has been improving its competitiveness in content through a partnership deal with NBC Universal. SK Planet (11st) has seen an increase in transactions amid the spread of COVID-19. The business environment has worsened for ADT Caps but should recover in 2H20 as the impact of the pandemic dissipates. One Store, the Android app store run by SK Telecom, ranks second in the domestic market after Google Play (Apple's App Store ranks third) and continues to enjoy steep growth.

2020 operating profit forecast at KRW1.2tr (+8.9% YoY)

For 2020, we forecast sales at KRW18.3tr (+12.8%YoY) and operating profit at KRW1.2tr (+8.9%YoY). Impact of the COVID-19 outbreak is slowing down the shift to 5G in 1H20, but we expect the release of several new 5G smartphone models to drive the transition in earnest from 2H20. By end-2020, 5G subscribers are projected to reach 5.2mn. With marketing spend on a gradual decline compared to the start of 5G services, SK Telecom should start to report visible improvement in operating profit from 2H20.

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