Weak Core Wireless Results And Strategic Uncertainty Undermine SK Telecom's Value

SK Telecom (SKM), South Korea's largest mobile/wireless service provider at almost 50% share, has remained a frustrating but useful lesson in the perils of chasing "value" without context. While SK Telecom shares have long seemed undervalued, the company's weakening wireless business has been a growing concern, as is the possibility that more and more non-telco investments may be coming. At this point, given the significant uncertainties across the business, I'm just not interested in SK Telecom - there does seem to be value here, but I have a very real fear that management will squander it and/or that investors will see relatively little of it.

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Weak Core Wireless Results And Strategic Uncertainty Undermine SK Telecom's Value

SK Telecom Undervalued, But There Are Still Valid Reasons Why

Value and GARP investors know that there will be times where they must sift out the “cheap for good reasons” stocks from their watch lists, and SK Telecom (SKM) is a tough case in that regard. Although I thought expectations were low for the stock back in December of 2015 (and the shares are up about 15% since then, lagging the KOSPI), I had worries about management and competition that have lingered on to today.

The mobile business remains a good source of cash flow, but management hasn’t always (or perhaps even often) made good decisions about what to do with that cash flow. Right now, a lot of controversy surrounds just how far management will subsidize its SK Planet e-commerce operations (specifically 11st.com) and whether the new CEO will once again take the company down the path of M&A.

The shares do look meaningfully undervalued, but value of SK Telecom’s stakes in Hynix and POSCO (PKX) are significant parts of that value (both shares have more than doubled since late 2015) and Hynix in particular has been volatile over the years. I’m still not sold on management, and I’d like to see a greater commitment to returning cash to shareholders, but this could be a name to consider on this recent pullback.

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SK Telecom Undervalued, But There Are Still Valid Reasons Why

Seeking Alpha: SK Telecom May Be Cheap For Some Good Reasons

I wasn't particularly bullish on SK Telecom (NYSE:SKM) back in April, but I thought the combination of more disciplined competition in the South Korean mobile market and increasing growth of LTE subs would at least be good for dividend coverage. As it turns out, growing MVNO subs and fierce rate competition have kept a lid on per-user growth, leading to several underwhelming quarters at the operating line. What's worse, it looks like management hasn't completely moved beyond its value destroying aspirations of empire building.

I guess the good news here is that the business hasn't eroded as dramatically as the 20%-plus decline in the share price might otherwise suggest. In fact, a lot of what's wrong with SK Telecom's share price performance could be tied to the wider rout in emerging markets, as the local shares (017670.KS) are down only about 8% more than the KOSPI index as a whole (-15% versus -7%).

The company's lower ARPU has led me to revise my growth expectations lower, but today's share price is still about 20% below my fair value estimate. Unfortunately, I have real concerns about management's ability to effectively deploy capital. Rumors of a spin-off of non-strategic investments in POSCO and Hynix are encouraging but not new, and I think investors considering these shares need to at least contemplate the risk that the shares look undervalued for some good reasons.

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SK Telecom May Be Cheap For Some Good Reasons

Seeking Alpha: Turkcell Looking At Short-Term Pain For Long-Term Gain

Neither Turkcell (NYSE:TKC) nor its local rival Turk Telecom (OTC:TRKNY), who operates Avea, have been getting much love in the market and it gets even worse when you factor in the currency moves between the dollar and lira. That comes despite the fact that the Turkish mobile market is actually pretty healthy relative to other emerging markets (South Africa, Russia, the Middle East, North Africa, et al) and there are credible reasons to think that the market will get more rational.

Turkcell at long last managed to hold its annual meeting and pass a dividend, a move that investors were waiting literally years to see. Turkcell being Turkcell, there are still challenges and controversies - Cukurova is trying to gain control of the company via a "shotgun clause" (that the Turkish government could reject), the company is adjusting to a new CEO, the company may be looking to make an acquisition in Ukraine, and the company will be looking at spending billions on new 4G licenses and equipment. While there are definitely some risks that cash could be flying out of the company for the next few years, I think the long-term advantages of the 4G migration outweigh the short-term volatility.

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Turkcell Looking At Short-Term Pain For Long-Term Gain

Seeking Alpha: LTE Penetration And Restricted Competition Should Benefit SK Telecom

It's increasingly difficult for telecom service operators in mature markets to post exciting top line growth, but that's not to say that SK Telecom (NYSE:SKM) doesn't have something to offer investors. I don't believe that South Korea's leading mobile services provider is likely to grow revenue at a long-term rate much above 3%, but I do think ongoing conversions of subscribers to LTE will support ARPU and margins. I likewise believe that the Korean government's willingness to hold the line on a law limiting subsidies will ultimately be good for margins for the industry.

SK Telecom doesn't appear radically undervalued to me today, but I wouldn't expect such a large and well-followed stock to trade at a wide discount. That said, I do believe the shares ought to trade closer to $30, and that the aforementioned boosts to ARPU and margins will wind up in shareholders' pockets in the form of higher dividends.

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LTE Penetration And Restricted Competition Should Benefit SK Telecom

Seeking Alpha: Despite Aggressive Competition, SK Telecom Has Remained On Top

As I have written recently in reference to companies like America Movil (AMX), Orange (ORAN), and NTT DoCoMo (DCM), navigating competition in the mobile services market has only gotten more challenging in most markets. SK Telecom (SKM) has the mixed blessing of operating in one of the most difficult markets of all, with KT Corp. (KT) and LG Uplus straddling, if not often crossing, the line between fierce and irrational competition in South Korea.

A recent move from regulators to punish all three carriers for violating rules on subsidies impacted first-quarter results, but there's at least a chance that a new rule will eliminate these moves in the future and make competition a little more reasonable. The more rational SK Telecom's rivals get, the better for SK Telecom, and these shares do look a little undervalued today. Combined with a good yield, these shares do hold some appeal on the prospect of better earnings potential in South Korea.

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Despite Aggressive Competition, SK Telecom Has Remained On Top

Investopedia: Enthusiasm Over SK Telecom Has Gone Far Enough

Investors don't love telecom service providers like they used to, largely due to extreme competition that has made it difficult to grow revenue or improve margins, all the while spending billions on equipment to keep the network current. It's arguably worse in the case of SK Telecom (NYSE:SKM), as management here has made it clear that they believe they're able to do more than just run a telecom business and have deployed billions of dollars in questionable non-telecom investments. While the sharp run-up over the past year was largely reasonable, as it brought SK Telecom back into parity with many of its global peers, it's hard to argue that these shares deserve to go much higher.

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Investopedia: SK Telecom - More Than Meets The Eye?

Mobile phone service isn't the business it used to be. High penetration rates in most markets and increasing price competition has damaged the growth prospects of the industry, while increasing ADR and ETF growth has given investors more plays on non-U.S. markets. All of that said, there may be a little more skepticism in the price of SK Telecom (NYSE:SKM) than the fundamentals really support.

Not a Great End to The Year
That's not to say that the end of 2011 was especially strong for South Korea's leading wireless carrier. Revenue fell 2% as average revenue per user (ARPU) dropped more than 3% on rate cuts and lower fees.


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FinancialEdge: Kim Jong Il's Death And The Markets

When news broke late Sunday night that North Korean dictator Kim Jong Il had died, there was pretty much an instant sense of uncertainty and nervousness in Asian markets. The reason for this unease is not hard to ascertain; North Korea is a desperately poor country with a huge military. If the new leader, Kim Jong Un cannot quickly cement his power and authority, there is the threat and risk of civil war, military provocation against South Korea and/or Japan, and a continuation (or escalation) of the brinksmanship that Kim Jong Il used to keep world powers ill at ease.

What will this change in power mean for the markets, both in Asia and in the United States?


Markets Generally Hate Uncertainty 
It was not surprising to see markets in South Korea and Japan sell off on the news of this change in North Korea. More than anything, markets hate uncertainty and there is now a gigantic red question mark where North Korean policy is now concerned. To that end, it is perhaps a bit surprising that gold was barely up as of early Monday morning.

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