Plans to Further Pursue M&As
The author is an analyst of NH Investment & Securities. He can be reached at jaemin.ahn@nhqv.com. -- Ed.
- After a spin-off from SK Telecom (SKT), SK Square resumed trading as a new stock on Nov 29, with a starting price of W82,000. SK Square’s share price tumbled shortly afterwards amid broader stock market uncertainties, and supply-demand issues. However, we view this decline as being excessive.
- We attribute the recent correction to existing SKT investors selling off the SK Square shares they acquired from the spin-off out of a preference for stable dividend-payers (as SK Square is unlikely to pay out dividends in the near future). For the first three days since its listing, foreign investors sold about 1.57mn shares, and institutional investors around 1.21mn shares. While it is difficult to gauge the volume of additional sell-off, we believe the negative impact from the supply-demand issues has been resolved given the large amount released onto the market.
- We calculate SK Square’s EV by applying a 50% discount (average rate among holding companies) to its net asset value (NAV) of W24tn, translating to EV of W12tn. Based on Dec 2 closing prices, we view the firm’s current market cap of W9.7tn as being significantly undervalued at a 60% discount to NAV. Of note, SK Square has announced growth strategies targeting NAV of W75tn by 2025.
- In particular, the company’s major subsidiary, SK Hynix, is receiving tailwinds on the back of an improving industry outlook, as seen in its recent share price increase. Moreover on Nov 29, SK Square initiated its M&A efforts when it announced acquisition of both a 35% stake (for W90bn) in Korbit, a cryptocurrency exchange, and a 40% stake in Neptune’s subsidiary, On Mind, known for its 3D digital human rendering technology. Of note, we have yet to reflect the newcomers’ EVs in overall NAV.
- SK Square’s catalyst resides in subsidiary IPOs and growth of portfolio companies. It recently announced the acquisition of Korbit and On Mind, and plans to further pursue M&As with companies that can synergize with its affiliate SKT, and its subsidiaries (11st, Content Wavve, etc). And, SK Square is to actively pursue M&As across the entire value chain surrounding SK Hynix. Ultimately, SK Square is striving to become an investment-oriented player based on active portfolio management, rather than simply being a holding company.
- We view the accusations by some market participants that the company plans to lower its EV in order to be merged with its parent SK Inc as being wildly misguided as: 1) prior to the spin-off, SK Square CEO Park Jung-ho stated that he has no plans for a merger in the foreseeable future; and 2) the NAV and EV of SK Inc, which sits at the top of the entire SK Group, rise in tandem with SK Square’s EV appreciation. As a result, it is difficult to suppress SK Square’s EV in order to boost SK Inc’s EV. In addition, such a corporate action seems improbable given that SK Group Chairman Chey Tae-won is serving as the chairman of the Korea Chamber of Commerce and Industry (KCCI), and further given the rising importance of ESG in corporate management.