SK Telecom: An Affordable Anti-Dollar Opportunity

Here is how I look at investments:

- I start with an industry that has some positive trends working for it (wireless telecom services are ok; add emerging markets and it gets interesting)

- I look for companies that have valuation at or below 10x Enterprise Value/Free Cash Flow (EV/FCF)

- I try to make sure that there's little catastrophic that can happen to the story

- I look for companies that hopefully have good management and a history of providing value for shareholders

- These companies should also have either a trigger for positive revaluation or at least upside options

SK Telecom (SKM) appears to fit these criteria. Wireless telecom services continue to grow in Korea, though the market is quite mature with penetration rates at 80%. SKM has about half the market and government regulation seems likely to allow for continued profitability and market share at these levels.

By my calculations, the company currently trades for 9-10x EV/FCF. My catastrophe possibilities include unlikely events such as worldwide recession and war with North Korea. Though my clients and I have owned SKM for about two years, I don't have above average confidence that management will always act in the best interest of shareholders; inside ownership is about 20%, so at least interests are aligned.

My favorite part of the SKM story is the upside options, which are; (1) the dollar falling, (2) anything good happening from $1 billion investment in China Unicom (CHU), and (3) upside from current money-losing investments in Vietnam and Helio MVNO joint venture with Earthlink in the USA.

The fall of the dollar seems like a decent bet over the long-term -- who knows about the short-term.

SKM has a billion dollar investment in China Unicom via a convertible bond which is well in the money. Commentary from SKM management implies confidence in their involvement in CDMA developments in China regardless of CHU's fate - as there have been rumors about sale or breakup of CHU.

SKM is an also-ran in the Vietnam wireless market, but they have recently expanded their network nationwide (I believe) to make it a more viable competitor in this high-growth market.

I've always been dubious about the prospects for Helio. Helio is a branded reseller of wireless services here in the USA aiming for the high-end user/enthusiast with fancy data-centric handsets available only through them. Last week, Helio released the Ocean handset, which has gotten positive reviews from Walt Mossberg at the Wall Street Journal and the endgaget blog.

While I don't expect positive fireworks from this investment, I'm hoping for steady positive appreciation. The stock has had a tendency to shoot up to about $27-28/share and fall back into the low-20's. Should this spike end similarly, it might be an interesting investment opportunity.

Disclosure: Author and his clients own SKM

SKM 1-yr chart