SK Telecom Stock: Multiple Positives (NYSE:SKM)

Elevator Pitch

My investment rating for SK Telecom Co., Ltd’s (NYSE:SKM) [017670:KS] stock is a Buy.

In my previous August 16, 2021 update for SKM, I reviewed SK Telecom’s Q2 2022 financial performance. With this latest update, I discuss about the multiple positives for SK Telecom.

Firstly, profit margins for SK Telecom’s mobile business should expand going forward as competition between SKM and its rivals becomes less intense. Secondly, SKM is actively exploring new growth opportunities outside of its core mobile business, with its data centers and subscription services expected to be key drivers for the future. Thirdly, SK Telecom’s low single-digit forward EV/EBITDA valuation multiple isn’t expensive by any stretch. These positives support my Buy rating for SK Telecom.

Benign Competition In Korean Mobile Market

There are a number of indicators suggesting that the current level of competition in the wireless industry in South Korea is not as intense as it was in the past.

SK Telecom’s most recent quarterly results were good in absolute terms and also beat market expectations. Revenue for the company rose by +4% YoY to KRW4,290 billion in the second quarter of 2022, while its Q2 2022 operating income of KRW460 billion represented a +16% growth on a YoY basis. SKM’s actual second-quarter operating profit was +13% higher than the sell-side’s consensus operating income projection of KRW407 billion as per S&P Capital IQ data.

Notably, SKM’s mobile segment did well with the company’s mobile service revenue up by +2% YoY to KRW2,616 billion in Q2 2022 as indicated in its second-quarter earnings presentation. The expansion in mobile service revenue for SK Telecom in the recent quarter was driven by a +2.9% YoY growth in the number of mobile subscribers and a +0.7% increase in ARPU (Average Revenue Per User).

SK Telecom achieved good progress in selling its 5G mobile subscription plans. The percentage of 5G mobile plans subscribers as a proportion of SKM’s mobile subscriber base increased from 32% in Q2 2021 and 46% in Q1 2022 to 50% for Q2 2022. It is critical to note that the good performance of SK Telecom’s mobile business didn’t come at the expense of a substantial spike in marketing expenses. In actual fact, SK Telecom’s marketing costs declined by -6% YoY from KRW805 billion in Q2 2021 to KRW758 billion in Q2 2022. In QoQ terms, marketing expenses for SKM rose by a mere +2% in the most recent quarter.

At the company’s Q2 2022 earnings briefing, SK Telecom’s management emphasized that “there is very low likelihood of competition heating up again to attract 5G subscribers” in view of the fact that “the 5G market (in South Korea) is becoming more mature.” According to information provided by research firm Omdia, South Korea’s 5G mobile penetration rate was as high as 32.7% as of end-August 2022, which is the highest among countries around the world.

Therefore, it is reasonable to assume that the future profitability of SK Telecom’s mobile business will be decent, as the company won’t have to ramp up marketing expenses in light of more benign competition.

Growth Potential Of Non-Mobile Businesses

Looking beyond SKM’s core mobile business, SK Telecom’s non-mobile businesses have significant room for growth. In particular, I will focus on the company’s subscription services and data centers businesses.

On August 25, 2021, SK Telecom issued a press release announcing that it launched “a new brand T Universe” to sell “subscription packages that offer differentiated benefits including free international delivery for products on Amazon (AMZN) Global Store, 11st (name of Korean e-commerce platform) points and Google (GOOG) (GOOGL) One.”

T Universe has been a success for SK Telecom based on the initial metrics. As of June 30, 2022, T Universe boasted 1.2 million subscribers and a GMV (Gross Merchandise Value) of KRW260 billion based on the company’s disclosures at its second quarter investor call. This is just the tip of the iceberg when it comes to assessing T Universe’s growth potential in the long run. SKM had highlighted in its late-August 2021 media release that it sees T Universe’ GMV and subscriber base expanding to KRW8 trillion and 36 million, respectively, in 2025.

Separately, SK Telecom’s data centers business is another key area of growth for the company.

Revenue for SKM’s data centers business grew by a very strong +37% YoY from KRW27.0 billion in the second quarter of 2021 to KRW37.1 billion in the most recent quarter. SK Telecom’s Q2 2022 data center sales of KRW37.1 billion are equivalent to an annualized revenue of KRW148.4 billion.

At an investor briefing (audio recording and transcript not publicly available) in September 2022, SKM highlighted its goal of achieving data center sales of KRW370 billion in full-year 2026. The company also noted that its EBITDA margin for the data centers business could rise from the mid-30s percentage levels now to higher than 40% in the intermediate-to-long term thanks to economies of scale.

In a nutshell, some of SK Telecom’s non-mobile businesses like data centers and subscription services are still in the very early innings of growth.

SK Telecom Stock Valuation

SK Telecom’s shares are attractively valued in my opinion.

In absolute terms, the market values SK Telecom at 3.8 times consensus forward next twelve months’ EV/EBITDA based on valuation data sourced from S&P Capital IQ. SKM is the outright market leader in South Korea’s mobile market with a 45% market share according to Fitch Ratings’ data. With the competitive environment within the Korean wireless market becoming less intense as highlighted above, SK Telecom should command a higher EV/EBITDA multiple than what it is trading at now.

In historical terms, SKM currently trades at a 21% discount to the stock’s 10-year mean forward EV/EBITDA multiple of 4.8 times as per S&P Capital IQ data. In the last decade, SK Telecom has even traded as high as 6.5 times forward EV/EBITDA. Given that SK Telecom is putting in a lot of effort to grow its non-mobile businesses and develop new streams of revenue and earnings, there is a good change that SKM’s shares can benefit from a positive valuation re-rating in time to come.

Bottom Line

SK Telecom is a Buy-rated name in view of the multiple positives discussed in detail in this article, which should re-rate its stock price and valuations in the future.