Entering a Virtuous Cycle
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
SK Holdings’ fundamental value as a holding company remains valid, anticipating: 1) further strengthening in shareholder value via rising cash flow; and 2) brisk earnings momentum from new growth businesses. Governance restructuring also remains in the cards.
Entering into virtuous cycle as investment holding company
Marshalling its rising cash flow, SK Holdings is currently in the process of strengthening both shareholder value and its new growth businesses. Its dividend income is expected to clock over W1.1tn pa over the next 3~4 years, backed by SK E&S’s securing of financial resources for extra dividend distribution via asset disposals (10.3% stake in China Gas Holdings (worth W1,814.1bn). Of note, SK E&S accounts for 60% of SK Holdings’ overall dividend income. Adding in dividend income stemming from the planned listing of SK Biopharm, we see a 2020E DPS of at least W5,500 (W5,000 (30% of dividend income from affiliates) + W500 (assuming that 30% of cash influx is from sales of existing shareholders’ shares)).
Adhering to a Buy rating, we raise our TP from W260,000 to W310,000, reflecting: 1) share price adjustments for listed affiliates; and 2) the average value of SK Biopharm’s IPO price band. Although SK Holdings’ shares are currently trading at a 37% discount to NAV, we believe that valuations for major unlisted affiliates (currently reflected by book value or acquisition value) will rerate going forward
SK Biopharm listing bodes well
Although there have been some fears of delay in listing due to a stock market drop amid Covid-19, SK Biopharm is set to be listed at the start of July. SK Holdings is projecting cash influx of W225.5bn~W307.0bn through sales of 8% of existing shareholders’ shares. We believe that the firm’s NAV valuation will increase moving forward, believing that after SK Biopharm settles into the market, market interest will move onto the anticipated listings of SK Siltron, SK Pharmteco, and SK E&C.
In general, the listing of major unlisted affiliates is to bring along a mix of positives (including cash influx and valuation re-rating of the holding company’s shares) and negatives (such as a decrease in investment demand for the holding company’s shares led by direct investment to the listed affiliate). That said, we believe that the planned listing of SK Biopharm will prove positive on overall balance, expecting SK Holdings’ share price to be energized by: 1) low transaction liquidity; 2) expectations that SK Biopharm will be incorporated into the Kospi200 under an exception clause on Sep 11; and 3) the fact that short selling will be prohibited until Sep 15. Of note, in order for SK Biopharm to be added to the Kospi200 under an exception clause, its average market cap of 15 days trading after the listing must exceed W3.7tn.