SKT Earnings: Strong Profit Growth for Core Business but Focus on AI; FVE Down to $29 on Currency

SK Telecom SKM reported another solid result for first-quarter 2023, with revenue growth of 2.2% year on year and operating profit growth of 14.4% year on year. The key was its core mobile business growing operating profit 14.4% year on year, driven by the increased 5G customer base now accounting for 61% of its subscriber base, and some continued recovery in roaming revenue. Monthly mobile churn decreased slightly, averaging 0.7% per month in the first quarter, compared with 0.8% per month in first-quarter 2022. Fixed-line operator SK Broadband reported 3.5% year-on-year revenue growth but flat operating profit. As we have seen with telcos in other countries, growth was helped by data center revenue growth of 28% and cloud revenue growing 22%. We make no changes to our forecasts and lower our fair value estimate to $29 per ADR from $30, mainly due to the weakened Korean won. We see the shares as undervalued at these levels, with a potential catalyst coming from increased shareholder returns through buybacks on top of an already healthy dividend.

SKT announced a first-quarter dividend of KRW 830, in line with the dividends in each quarter of 2022. Maintenance of this quarterly dividend for the rest of the year would equate to a yearly dividend of KRW 3,320 or around $1.38 per ADR, implying a dividend yield at current prices of around 6.8%. The potential for increased dividends was one of the benefits of the post-spinoff SKT, which now has a dividend policy to return between 30% and 40% of EBITDA less capital expenditure—which worked out to a dividend payout ratio of 79% in 2022, up from under 50% in each of the previous three years. We assume a KRW 3,320 dividend in 2023. Management also indicated the company might look at buying back some stock depending on the share price—we assume it buys back KRW 100 billion of stock each year in our forecast. With net debt/EBITDA below 1 time, we believe the company may even have the capacity to buy back more than this.