[Click eStock] "SKT, Focus More on Demerger Than Earnings"

Declining Popularity of Telecom Stocks Makes SKT Market Cap Growth Difficult
High Valuation of Intermediate Holding Company for Future Merger Also Challenging

[Asia Economy Reporter Minwoo Lee] An analysis has emerged suggesting that more attention should be paid to the possibility of a spin-off of SK Telecom rather than its earnings. This is based on the judgment that SKT's market capitalization growth is difficult, and the intermediate holding company is heading toward a situation where it cannot receive proper evaluation.

On the 27th, Hana Financial Investment analyzed that the possibility of SK Telecom's spin-off is higher than ever, and a conservative investment strategy needs to be set. Kim Hongsik, a researcher at Hana Financial Investment, said, "Although it is not certain that the management's push for a spin-off will pass the shareholders' meeting, it is necessary to keep the possibility of approval in mind to some extent," adding, "It is most important to examine whether the combined market capitalization of the remaining SKT and the newly listed intermediate holding company will increase."

He predicted that optimistic prospects are realistically difficult. Researcher Kim said, "The direction favorable to major shareholders is clearly for SKT's market capitalization to increase while the intermediate holding company's market capitalization decreases, creating a structure advantageous for swaps and preparing for a future merger with the group holding company SK," and added, "The problem is that SKT's market capitalization growth is not easy due to market conditions, and the intermediate holding company is unlikely to be properly valued due to inherent limitations."

Some expect that considering SK's swap (selling SKT/buying the intermediate holding company), SKT's price-earnings ratio (PER) will be high and market capitalization will increase. This is the only way the market capitalization can increase after the spin-off and has considerable potential, but the investment sentiment toward telecom stocks is weak, and the low market capitalization of competitors is a hurdle. Researcher Kim pointed out, "Looking only at the telecom sector, SKT's operating profit is about 1.1 times that of LG Uplus, but LG Uplus's current market capitalization is only 5 trillion won," adding, "Unless LG Uplus surges, it is realistically difficult for SKT's market capitalization to exceed 10 trillion won."

He also viewed that the intermediate holding company is likely to remain undervalued. Considering only SK Hynix's market capitalization, it is 13 trillion won (applying a discount rate considering dividend tax), and theoretically, considering the value of other subsidiaries, the intermediate holding company's market capitalization could reach 18 trillion won, but the reality is not easy. Researcher Kim said, "It is a natural step for SK, which no longer has a reason to hold SKT, to concentrate shares into the intermediate holding company through swaps and then merge SK and the intermediate holding company," expressing concern, "If the intermediate holding company's market capitalization is large, it becomes an obstacle, so a discount rate will be applied, making it difficult to form even a 10 trillion won market capitalization."

Against this background, Hana Financial Investment presented SKT's expected 3-month stock price range as 230,000 to 300,000 won. The target price was maintained at 330,000 won. The closing price the previous day was 254,000 won.