SK Telecom - Management & Outlook

Part 2 - Risk Detail
Part 3 - Possible Upside
Part 4 - Competitor Review
Part 5 - Valuation and Assessment
Part 6 - Management & Performance Targets

Management:

** Integrity: Incomplete

The chaebol structure in South Korean business does give the unfamiliar observer some cause for concern. The problems with affiliate SK Networks where finances were misstated illustrates this country's issues with corporate governance. But it may be a mistake to overweight any insight based on little true understanding of the Korean culture. It is probably best to judge management on actual performance and results.

** Past Performance: B

SK Telecom, as a competitive entity, has been in existence for a little over ten years. While their market share has decreased markedly as expected due to competition, the company still seems to have a firm advantage in the wireless space and generates copious free cash flow with an underleveraged balance sheet (debt/equity ratio around 30%), especially compared to other industry participants.

Probabilities are completely subjective based on my research and judgment. Scores based on multiplying the probability by the projected stock price. Using $25 base price and a dividend of $0.95, odds the stock:

FCF > 2T KRW, S-Fone Vietnam segment generates FCF; Market share increases slightly while marketing costs ease; Hanarotelecom opens new growth opportunities via bundled offerings
1.47

FCF range: 1.7T - 2T KRW, S. Korean market remains fiercely competitive without let up; Hanarotelecom acquisition goes smoothly
2.87

FCF at 5-year trends: 1.5T - 1.7T KRW; no real progress in foreign markets; Hanarotelecom generates little growth or earnings
1.69

FCF slips below 5-yr trend; margins continue to compress due to competition/marketing costs; foreign ventures continue to suck capital
-0.39

FCF falls dramatically (< 1T KRW); margins continue compression trend; write-offs in foreign ventures; ill-advised M&A attempt into US market
-0.95

little or no FCF due to deteriorating business; lose market share; pronounced South Korean recession reduces cross-holding value
-1.16

The nature of the South Korean market means little chance of SK Telecom going to zero due to government intervention but any type of systemic crisis a la the 1997 Asian Crisis could destroy the value of our investment for a number of years
-0.43

Total Score: 3.10 (12.39% of price)

Certainty Rating: B+

SK Telecom is a dominant operator in a recession-resistant industry, situated in a relatively stable Asian market that has arguably "emerged." Throw in a nice 4% non-US-denominated yield and nice growth prospects in the "next China" (Vietnam) and really, what more could you ask for? The company is selling at a discount despite having solid and stable cash flow for the foreseeable future and it all adds up to a relatively safe investment.

2008 FCF ~1.7T - 2.0T KRW
Marketing expenses (commissions paid + advertising as shown on income statement) < 35% of revenues as opposed to Q3 2007: 38%.
Keep market share stable or slightly increasing.
See Vietnam S-Fone venture become "successful" (i.e. generate FCF).
Maintain or increase dividend payout.
Integrate Hanarotelecom and recognize synergies via bundled offerings.

DISCLOSURE: Please see our portfolio page for all disclosures.

This report reflects the research and analysis I've performed on this company. It is provided for informational purposes only and does not constitute personalized financial advice nor an endorsement or solicitation to purchase stock in this or any other company. Please do your own due diligence or hire a financial advisor before making any investment decisions.

The author received no compensation and is not affiliated with the company reviewed in this report with the possible exception of being a shareholder. The author reserves the right to buy or sell the stock as deemed personally prudent without further notification

The Enlightened American

SK Telecom - Management & Outlook