SK Telecom Reports Solid Core Results; FVE Revised to USD 5.50 After Stock Split and Spin-Off

We revise our SK Telecom, or SKT, fair value estimate to USD 5.50 per ADR after adjusting for the third-quarter result, the 3-for-1 stock split and spin-off of the SK Square business, which includes the SK Hynix stake and the security, e-commerce and platform services businesses. The remaining SKT business includes the wireless and broadband telecom businesses that have been performing well in 2021 to date. Our narrow moat rating is retained as this was always based on the core telecom business. SKT's third-quarter 2021 result was solid with year-on-year revenue growth of 5.0% and operating income growth of 11.2%. Of particular interest to SKT shareholders after the spin-off is that the mobile business, which generates around 75% of post-spin-off revenue and 80% of operating profit, grew revenue at 2.5% and operating profit at 21.9%. The fixed-line business, which generates the bulk of the remaining revenue and profit grew revenue at 10.4% and operating profit at 34%. We see the new company structure as logical and positive, allowing investors a clear choice between the steady, normally lower-growth telecom businesses in SK Telecom and the potentially higher-growth businesses in SK Square. We note the post-spin-off SKT has a new dividend policy to return between 30% and 40% of EBITDA less capital expenditures, which should at least allow for the dividend to grow with free cash flow growth, following the company paying a flat dividend since 2015.