LeoPatrizi
I proceed to price SK Telecom Co., Ltd.’s (NYSE:SKM) [017670:KS] shares as a Purchase. I’ve noticed constructive indicators referring to SKM’s core cell telecommunications enterprise and the corporate’s AI-related progress initiatives. SK Telecom’s present valuation metrics point out that the corporate’s shares have significant upside potential.
With my prior July 4, 2024, replace, I highlighted that SKM is a number one telecommunications firm when it comes to “cell section market share” and “AI competitiveness.”
Core Cellular Telecommunications Enterprise Has Benefited From Profitability Enchancment Initiatives
SKM’s most up-to-date quarterly monetary efficiency was good due to the advance within the profitability of its core cell telecommunications enterprise.
Working revenue for SK Telecom rose by +16% YoY and +8% QoQ to KRW 538 billion within the second quarter of this 12 months, as disclosed in its outcomes presentation slides. SKM’s precise Q2 2024 working earnings represented a 4% beat in response to consensus knowledge sourced from S&P Capital IQ.
The core cell or wi-fi telecommunications enterprise contributed 84% of SKM’s Q2 2024 working earnings. The corporate derived the remaining 16% of its second quarter working revenue from pay tv, mounted line providers, and different B2B (Enterprise-To-Enterprise) companies. The efficiency of SK Telecom’s core cell telecommunications enterprise has the most important affect on the corporate’s total ends in the close to time period as a result of SKM’s wi-fi providers accounted for the overwhelming majority of its working revenue.
The working margin for SK Telecom’s cell telecommunications enterprise expanded by +1.9 share factors YoY from 12.2% in Q2 2023 to 14.1% for Q2 2024. This was the important thing issue driving SKM’s newest Q2 2024 working revenue beat.
SKM shared at its Q2 2024 analyst briefing that it has applied initiatives to “promote excessive ARPU (Common Income Per Consumer) value plans and appeal to excessive tier subscribers. The corporate additionally indicated at its latest quarterly outcomes briefing that “the (Korean) telecommunications corporations are not competing on subsidies, however slightly competing on value plans and differentiated advantages and providers.”
In different phrases, competitors has grow to be much less intense in South Korea’s cell market, and this has enabled SK Telecom to market its premium wi-fi subscription packages. Notably, SKM’s cell ARPU improved by +2.1% YoY to KRW 29,298 in Q2 2024.
However, SK Telecom famous in its second quarter outcomes presentation slides that its cell telecommunications enterprise has achieved “price stabilization” attributable to “efforts to enhance working effectivity.” In particular phrases, SKM’s advertising and marketing and depreciation prices declined by -4% YoY to KRW 1,406 billion for the most recent quarter.
Trying forward, I take the view that SKM is more likely to register favorable monetary outcomes for full-year FY 2024.
One constructive issue is that the Korean cell market is already previous the section of gamers competing aggressively for 5G subscribers. Over 70% of SKM’s cell subscribers are on 5G wi-fi plans as of end-Q2 2024, which means that the 5G penetration degree in all fairness excessive in South Korea. Subsequently, SK Telecom and its rivals are likely going to put a higher emphasis on monetizing present 5G subscribers than chopping costs to draw new ones.
The opposite constructive issue is that SK Telecom has the intention to proceed with expense management and revenue margin enhancement initiatives for the foreseeable future. At its Q2 analyst name, SKM emphasised that it’s “dedicated to bettering the enterprise fundamentals of the mounted and cell companies by OpEx (working expense) and CapEx (capital expenditures) effectivity” optimization measures.
I’m anticipating a low-teens share progress in SK Telecom’s working revenue for full-year FY 2024. In distinction, SKM expanded its working earnings by a comparatively extra modest +9% to KRW 1,753 billion within the prior fiscal 12 months or FY 2023. My constructive expectations of working revenue progress acceleration for SKM this 12 months is supported by the advance in aggressive dynamics for Korea’s wi-fi market and the corporate’s intention to optimize prices and capital investments.
Latest AI-Associated Developments Are Favorable
The working margin growth of SKM’s cell telecommunications enterprise would be the key short-term monetary efficiency enchancment driver for the corporate within the close to time period. For the intermediate to long run, SK Telecom’s AI-related choices would be the main progress engine.
Latest developments counsel that it’s only a matter of time earlier than SK Telecom delivers on its AI progress initiatives.
Firstly, SK Telecom’s income generated by its knowledge heart enterprise and cloud providers enterprise elevated strongly by +21% and +28%, respectively in Q2 2024. On the firm’s Q2 2024 outcomes briefing, SKM attributed the sturdy progress for its knowledge heart enterprise to “AI-driven demand” and it disclosed that its cloud providers enterprise “efficiently gained the primary order for AI cloud” within the newest quarter.
Secondly, SKM guided for incremental AI-related income contribution of KRW 60 billion this 12 months referring to the providing of “generative AI, AICC (AI Name Heart) and AI knowledge promoting options to the monetary and the manufacturing sectors” as per its Q2 earnings name commentary. This serves for example of how SK Telecom is exploring the availability of recent B2B (Enterprise-To-Enterprise) AI choices focused at particular industries.
Thirdly, the corporate’s B2C (Enterprise-To-Client) AI product often known as “A Dot” has continued to realize significant traction. In late September final 12 months, SK Telecom revealed “the official launch of” A Dot, which it described as a “private AI assistant service.” An earlier 2023 CNBC information article additionally referred to A Dot as SKM’s “synthetic intelligence chatbot.” As disclosed in SKM’s Q2 2024 outcomes presentation, the A Dot subscriber base grew by +155% to 4.6 million on the finish of June this 12 months, or 9 months following its official introduction to the market. A rising variety of subscribers for A Dot will give SK Telecom alternatives to monetize this B2C AI providing.
In my July 2024 article, I highlighted that SKM’s “AI competitiveness” will help its purpose to develop “the proportion of gross sales contributed by the corporate’s AI-related providers and merchandise from beneath 10% now to 36% by FY 2028.” The most recent AI-related developments for SK Telecom talked about above have boosted my confidence within the progress prospects of the corporate’s AI-related companies.
Variant View
There are particular dangers to look at with respect to SKM.
SK Telecom’s core cell telecommunications enterprise might carry out badly within the state of affairs that this enterprise fails to handle prices nicely and the aggressive depth within the Korean cell providers market rises.
SKM’s future AI income progress outlook is perhaps extra modest, assuming that AI-related demand weakens going ahead.
Conclusion
There are constructive read-throughs from the latest efficiency of SKM’s cell telecommunications enterprise and the most recent metrics for the corporate’s AI-related choices. However these positives have but to be adequately mirrored in SK Telecom’s valuations, and for this reason I’ve retained my Purchase ranking on the inventory.
Based mostly on S&P Capital IQ knowledge, SK Telecom presently trades at 4 instances consensus subsequent twelve months’ EV/EBITDA and gives a consensus subsequent twelve months’ dividend yield of 6%. A valuation rule of thumb is {that a} inventory is pretty valued if its earnings a number of is roughly equal to its earnings progress price. SKM’s consensus FY 2023-2026 EBITDA CAGR estimate is +10% as per S&P Capital IQ, which means {that a} high-single digit EV/EBITDA ratio for the inventory will not be unreasonable. Additionally, SK Telecom’s dividend yield might doubtlessly compress to a low-to-mid single digit share sooner or later, when traders have a greater appreciation of the corporate’s mid-to-long time period progress prospects pushed by AI.
