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Ample upside potential

Recommendation and valuation

We maintain our Buy rating on SK Inc. and raise our target price to W279,000 (from W275,000). We believe our target price is conservative, given: 1) SK AX’s growth trajectory (driven by full-scale AI adoption and productivity gains); 2) the conservative discount we applied to subsidiary valuations; and 3) the company’s commitment to fixed dividends and capacity for share buybacks/cancellations.

We estimate SK Inc.’s standalone enterprise value at W6.5tr, which is based on our 2026 EBITDA estimate of W1.3tr and an EV/EBITDA multiple of 5.2x―the average of system integration (SI) peers Samsung SDS (3.4x) and LG CNS (7.0x). While SK AX’s 2026F EBITDA (W0.4tr) is smaller than the levels of Samsung SDS (W1.6tr) and LG CNS (W0.7tr), we believe our multiple is justified given steady cash inflows from affiliate royalties and dividends. We also treat dividend income from affiliates somewhat conservatively in our estimates. For SK Telecom (SKT), which faces an inevitable earnings decline due to subscriber losses following a major data breach earlier this year, we reflected the standard dividend policy of returning 50% of annual net profit. However, with earnings likely to normalize to some extent in 2026, we see a possibility that dividends could recover to the 2024 level. For SK Innovation, an annual fixed dividend of W2,000 is planned through 2025, and the company has committed to a shareholder return ratio of at least 35% starting in 2027. While the 2026 dividend has not yet been announced, we think it could exceed W2,000. Also factoring in conservative assumptions for dividends from other subsidiaries, we see total dividend income in 2025 declining 20% YoY to W658bn. Meanwhile, we value equity holdings in subsidiaries at W18.9tr, applying a 50% discount. For listed companies, the discount is appropriate to account for potential valuation overlaps. For unlisted subsidiaries, the discount may seem excessive; however, except for SK Pharmteco, we note that these companies have either been valued through prior sales or K-OTC pricing, or are expected to be sold in the future (supporting a conservative discount).

Under its shareholder return policy, SK Inc. plans to pay a fixed dividend of W5,000 per share (including the W1,500 interim dividend already paid in 1H25) and allocate 1?2% of its market cap to share buybacks/cancellations as a means of distributing divestment proceeds to shareholders. Considering the rise in market cap compared to the beginning of the year, we expect a W150bn buyback to be executed within the next three months. Based on the current share price, dividend yield is estimated at 3.5-4.5%.

While policy adjustments could arise as further Commercial Act amendments are proposed/passed, we believe the overall trend toward treasury share cancellations is inevitable. We conservatively estimate that 10?15% of SK Inc.’s treasury stock (25% of total) could be canceled. While some expectations are priced in, the 49% discount to total NAV suggests the stock has ample upside potential should cancellations proceed.