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Financials improving rapidly

Recommendation and valuation

We maintain our Buy rating on SK Inc. and raise our target price by 20% to W275,000 (from W230,000). Our target price reflects the value of the standalone business―which includes SK AX (IT services) and dividend income―and the value of subsidiary stakes (50% holding company discount). Starting in 2H25, we expect AI adoption and digital transformation efforts to accelerate across domestic companies. Against this backdrop, SK Inc., which is currently in charge of building and operating AI data centers for SK Group affiliates, appears well positioned to deliver meaningful earnings growth over the longer term. Reflecting this, we now base our target EV/EBITDA for the standalone business on the average multiple of domestic system integration (SI) players (vs. holding company peers previously).

Financials improving rapidly

SK Inc. sold its data center assets to SK Broadband for W506.8bn (Jun. 30). Previously, the firm sold an 85% stake in subsidiary SK Specialty to a private equity firm for W2.7tr (end-2024), leading to a decrease in standalone net debt to W7.9tr. And the firm is now reportedly in the process of selling its stake in wafer-making subsidiary SK Siltron. If the stake sale is completed as planned, we forecast standalone net debt to decline to the W5tr level―the lowest level in five years.

Although consolidated net debt remains high at W61tr due to SK On’s massive liabilities, further earnings deterioration at the subsidiary is likely to be limited in light of its battery supply contracts totaling W15tr secured over the past six years. Moreover, SK E&S should provide a strong source of cash flow, curbing any additional erosion of financial health.

Solid shareholder return expectations

SK Inc. has committed to a shareholder return policy that includes share buybacks equivalent to over 1% of market cap annually from 2022 to 2025, on top of its regular dividend payout. The company’s treasury share holdings currently account for more than 24.6% of its issued shares. As regulatory momentum related to treasury stock cancellations is growing, SK Inc. could come under pressure to retire shares. However, since a large portion of its treasury stock was acquired during the SK C&C merger, a full cancellation would trigger a tax burden of around W500bn. As such, we believe a partial retirement is more likely than full cancellation. Given the firm’s improving financial structure and solid cash-generation capacity, we believe SK Inc. is well-positioned to absorb any related tax impact.