SK Networks Falls Short of Consensus, Yet Target Price Raised?

[Asia Economy Reporter Gong Byung-sun] SK Networks posted second-quarter earnings this year that fell short of market expectations. However, securities firms still recommended investment, citing the bright outlook for the rental business. Some even raised their target stock prices.

As of 9:47 a.m. on the 3rd, SK Networks recorded 5,870 won, down 4.86% (300 won) from the previous day. Although the stock price rose to the 6,000 won range in early last month, it fell for two consecutive days this month and dropped back to the 5,000 won range.

The reason for the decline in SK Networks' stock price is the second-quarter earnings this year that fell short of market consensus. According to the earnings announced the day before, operating profit in the second quarter was 26.1 billion won, down 13.7% from the same period last year. This was 36.5% below the consensus of 41.1 billion won.

The sluggish performance of the information and communication sector led to results below consensus. This was due to a decrease in sales performance as new terminal product launches were not active. In fact, amid a global semiconductor shortage leading to a decline in smartphone shipments worldwide, the number of new products released in the first half of this year decreased by 18% compared to the same period last year. As a result, sales in the information and communication sector fell 28.11% quarter-on-quarter to 1.0372 trillion won.

However, securities firms maintained a "buy" investment opinion. Samsung Securities even raised the target price from the previous 6,000 won to 7,000 won. The reason is that SK Networks has started to focus more on its growth businesses, such as vehicle and home appliance rental services.

SK Networks has already shown its intention to focus on growth businesses by ending its steel trading business. On the 6th of last month, SK Networks decided to terminate its steel trading business through a board meeting. Although it was a business conducted since the late 1970s, the role of SK Networks was diminishing as volatility in steel market conditions increased and manufacturers' direct transactions increased. This decision was also made to concentrate capabilities on growth businesses.

The securities industry views the outlook for SK Networks' focused rental car business in the second half of the year positively. It is expected that earnings will increase in the second half as well as the first half due to rising used car prices and increased domestic travel demand. Lee Jae-sun, a researcher at Hana Financial Investment, explained, "There is room for further improvement in rental car segment earnings due to the implementation of social distancing level 4," adding, "It is necessary to reevaluate SK Networks, the second-largest domestic vehicle rental company."

Expectations are also high for the growth of SK Magic, a home appliance rental company. In the second quarter, operating profit decreased 17.82% quarter-on-quarter due to advertising expenses aimed at increasing rental accounts. However, securities firms expect performance recovery from the second half of the year based on the increased rental accounts during the second quarter as the burden of advertising expenses eases. Baek Jae-seung, a researcher at Samsung Securities, said, "I agree with SK Networks' direction to focus more on the rental business," but added, "Since investment in growth businesses must continue, more time is needed for profit growth."