Investment Thesis: Despite short-term pressures, SK Telecom may see long-term upside based on strong balance sheet metrics and revenue growth across the media segment.
In a previous article back in May I made the argument that while SK Telecom (NYSE: SKM) has seen impressive growth due to 5G uptake, inflation may be a concern due to higher costs of capital investment. In addition, I also warned that a further decline in stocks could erode overall gains.
Since then, we’ve seen the stock continue to decline before seeing a slight recovery in the past few months:
The purpose of this article is to determine whether SK Telecom may have room to recover further given the recent downside.
My previous article made the argument that in an inflationary environment, SK Telecom will need to prioritize cash flow to meet rising costs.
I previously noted that given the company’s cash for long-term loans and notes payable increased to more than 30% for December 2021 and March 2022 – continued growth in this measure should be an encouraging sign.
We can see that for June and September 2022 – cash and cash equivalents grew while long-term loans and notes payable fell significantly, resulting in a higher cash to long-term loans and notes payable ratio.
|cash and cash equivalents||211.9||315.7||407.7||436.7||649.4||583.6|
|Long-term loans and notes payable||1376.6||1403.8||1255.1||1326,3||1245.2||852.4|
|Cash to long-term loans and notes payable ratio||15.39%||22.49%||32.48%||32.93%||52.15%||68.47%|
Source: Figures from SK Telecom Investor Briefing: 2022 Q1 Results. Cash to long-term loans and notes payable ratio calculated by author.
This coincided with a lower level of capital expenditure compared to last year:
In this regard, the fact that the company has managed to increase its cash relative to long-term borrowings is an encouraging sign – as it means that SK Telecom has more liquidity to deal with a potential drop in revenue and is not dependent on long-term debt to maintain his business.
In terms of performance metrics, we can see that churn has maintained a rate of 0.8% over the past year. Additionally, we can see that ARPU (or Average Revenue Per User) has seen a slight decrease from that of the same quarter last year. Additionally, 5G subscription growth continued to be impressive, up 44% from last year.
|Term||Monthly Churn||5G subs||ARPU|
|3Q20||0.9%||4 263||30 051|
Source: Figures derived from SK Telecom Investor Briefing 2022 Q3 results.
That said, growth on a percentage basis is down from 102% from 3Q20 to 3Q21 – which is expected as market demand begins to mature.
Additionally, while 5G subscriptions grew 6.73% from 2Q22 to 3Q22, this was down from previous growth of 10.18% from 4Q21 to 1Q22.
In this regard, the cash position for SK Telecom remains strong, but modest revenue growth appears to have led the stock lower since May.
Going forward, aside from the effects of inflation potentially limiting customer demand — investors may still worry that the growth the company has seen in 5G demand could eventually level off.
Although this is a concern, I believe that the company’s balance sheet performance is highly encouraging, as SK Telecom has reduced its long-term debt while still strengthening its cash reserves. Even if revenue growth remains modest in the short to medium term, continued improvement in these metrics could mean further potential upside for the stock.
Moreover, SK Telecom’s performance across the media segment has been quite impressive – up more than 20% year-on-year.
This is higher than the 10% growth we saw for the year-over-year Q1 2022 results, and we can see that growth in data center and cloud revenues has boosted the segment overall:
To conclude, SK Telecom continued to show strong balance sheet statistics and while investors may have concerns about moderate revenue growth, growth across the media segment remains strong.
While the stock may see further downside if economic conditions deteriorate significantly, I believe the stock still has upside in the longer term.