[KCGF Opinion] SK Inc's value-up gets D for lack of substance, while SK Telecom earns B for showing more consideration

6 Nov 2024



SK Inc's value-up gets D for lack of substance, 

while SK Telecom earns B for showing more consideration

 


SK Inc’s value-up lacks discussion of capital costs or capital allocation 

To enhance value SK Inc should cancel 25% of treasury shares on its balance sheet. BoD is urged to take decisive action



SK Inc, the first non-financial holding company to announce a value-up plan on Oc- tober 28th, receives a disappointing "D" grade due to the plan's lack of substance,  despite the company having a better quality board than other Korean companies. On the same day, SK Telecom unveiled its own value-up plan, which was deemed more comprehensive and was given a "B" grade.


SK Inc’s D grade is due to these five reasons:


1. No discussion on capital costs and capital allocation principal;


2. Absence of treasury share cancellation plans, which accounts for 25% of the

total issued shares currently and is a major contributor to the current valua- tion discount;


3. Absence of accountability and solutions: Chairman Chey Tae-won has failed to address the significant share price weakness over the past 3 and 5 years (declines of 39% and 42%, respectively);


4. Insufficient detail on ROE and PBR improvement; and


5. Inconsistent plan. The calculation of shareholder return ratio is based on parent basis, while the overall plan seems to encompass the entire group, which is not in line with global standards.



SK Inc’s plan lacks detail and appears insincere, in our view. Instead of using fancy  terms such as "portfolio rebalancing & operation improvement," the company should  focus on the core issues. The simplest way to enhance shareholder value is to can- cel treasury shares on its balance sheet. The eight-member board just needs to  make a decision for the interest of minority shareholders. This is the largest treasury  share holdings (25% of total issued shares) among major Korean listed companies,  effectively using minority shareholders' money to protect the controlling stake of  Chey Tae-won and his affiliates.


Despite having a board composed of high-caliber members, the company has failed to address these concerns. Given their track records in delivering shareholder value through initiatives such as treasury stock repurchases, independent directors Yoon Chi-won and Kim Byung-ho, who previously held leadership positions at UBS and Hana Financial Group, respectively, must understand the critical importance of value creation. Furthermore, other independent directors Yeom Jae-ho, Kim Sun-hee, and Park Hyun-ju, with their distinguished backgrounds in academia, consumer goods, and law, should be fully aware of the factors driving SK Inc’s share underperfor- mance and the urgent need to prioritize shareholder value.



SK Inc has been on a path of value destruction, as evidenced in the sharp decline of ROE and PBR, which has fallen from 1.0x in 2016 to 0.75x in 2020 and 0.4x in the first half of this year. This decline can be attributed to the company's excessive debt and ill-advised investments, which have led to a 50% increase in assets over the past three years. Although the company is now focusing on debt deleveraging, a more comprehensive plan is required to restore shareholder value.


The market's and shareholders' lack of confidence in Chairman Chey is hindering the company's recovery, in our opinion. To restore shareholder value, it is imperative to improve both ROA and ROE. However, without transparent disclosure of detailed plans, it will be challenging to rebuild market trust. Despite claiming am average 62% shareholder return ratio based on parent financial statements over the past four  years, the board and management should delve deeper into the reasons behind the  continued decline in equity valuation. 


The board should also address the issue of multiple listings of subsidiaries and affili- ates and provide a clear direction for value enhancement. By contrast, Alphabet,  Google's parent company, has successfully aligned all value creation within a single  listed holding entity, demonstrating a more efficient and focused approach.


 



The subsidiary, SK Telecom, demonstrated a higher level of sincerity in its value-up  plan compared to the parent company, and was thus earns a 'B'. It offers a more se- cure investment proposition. The company's acknowledgment of a 7-9% COE and its disclosure of ROIC, debt trends, and a 2.6% spread between 2023 ROE and COE are steps in the right direction. However, the provided data is limited to a three-year period, falling short of the ideal 10-20-year timeframe for comprehensive manage- ment analysis and shareholder disclosures. Despite this limitation, the company's stated goals of achieving a ROE exceeding 10%, expanding the equity spread, and returning over 50% of consolidated net income to shareholders are commendable.


However, it is difficult to understand why specific capital allocation principles were  not outlined.






October 29, 2024

Korean Corporate Governance Forum 

Chairman, Namuh Rhee