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Responsible investment approach to ease valuation discount

Shareholder return expectations remain high

We maintain our Buy rating and target price of W275,000 on SK Inc. The ongoing divestment of non-core businesses is helping to reduce standalone net debt, and the recent capital increase involving SK Innovation and SK On appears to have helped ease the overall financial burden across the group. Recently, shares of SK Inc. have surged due to recovery in investor sentiment toward holding companies, but the valuation discount caused by lingering financial concerns still has room to narrow further.

Assuming that SK Inc. proceeds with additional asset sales this year as planned (including its stake in SK Siltron), net debt could fall below W7tr, allowing the company to implement its shareholder return plans without any changes. The firm recently disclosed its participation in a subsidiary’s capital increase alongside an interim dividend of W1,500 per share.

Under its shareholder return policy, SK Inc. guarantees a full-year dividend of at least W5,000 per share and intends to allocate 1?2% of its market cap to share buybacks/cancellations or special dividends. Given that its market cap has increased more than 70% YTD, the total amount returned to shareholders could increase further. Based on the current share price, we estimate the dividend yield (including base and special dividends) at 3.5-4.5%.

Strategic investment that could generate upside

Subsidiary SK Innovation announced a W2tr capital increase. Of this, external investors will contribute W1.6tr (via a special purpose company), and SK Inc. will contribute W400bn. Notably, SK Inc. has signed price return swap (PRS) agreements for the W1.6tr from external investors, which will settle any difference between the issuance price and the share price after three years.

The issuance price is W111,000. If, at the end of three years, the share price is lower than the issuance price, SK Inc. will cover the shortfall. Conversely, if the share price exceeds the issuance price, the investors will be obligated to return the gains to SK Inc. However, external investors are subject to a one-year lock-up period.

This PRS arrangement can be interpreted as SK Inc. providing credit support to external investors (in its capacity as a holding company). As seen in an earlier case in which SK Innovation provided financial support to SK On and SK IE Technology, it is possible to raise funds solely through PRS agreements; the fact that SK Inc. is directly investing W400bn also suggests a responsible investment approach consistent with its holding company role. Naturally, as the parent company, we can assume that SK Inc. has clear visibility regarding the turnaround potential of its subsidiaries.