Moody's: SK Telecom's 4Q Results are Credit Positive
Published on: 29th Jan 2014
By: Ian Mansfield
Moody's Investors Service says that the better than expected consolidated results of SK Telecom for the fourth quarter of 2013 are credit positive.
On 28 January, SKT announced its 4Q 2013 financial results. Based on the results, Moody's estimates that SKT's adjusted debt/EBITDA improved to approximately 1.6x from 1.8x at 2012.
"SKT's leverage improved at a faster rate than we had expected. We believed its adjusted debt/EBITDA would only range between 1.6x and 1.7x towards the end of 2014," says Yoshio Takahashi, a Moody's Assistant Vice President and Analyst.
SKT's reported consolidated debt declined by approximately 5% to KRW6.5 trillion at end-2013 from KRW6.9 trillion at end-2012 because the company repaid debt using free cash flow, and the large majority of its USD333 million convertible bonds were either converted to equity or redeemed by cash.
"We expect its adjusted debt/EBITDA to continue to gradually improve to approximately 1.5x in 2014, supported by an improvement in earnings and cash flow," adds Takahashi, who is also the Lead Analyst for SKT.
Moody's expects that SKT's adjusted EBITDA will improve by a low-single digit percentage in 2014 due largely to the continued improvement in earnings from its LTE mobile business, as well as from the pay TV and corporate businesses of SK Broadband Co. Ltd. (SKB, unrated), its consolidated subsidiary.
In addition, Moody's expects SKT to maintain a low-single digit percentage growth in revenue, while keeping its adjusted EBITDA margin between 32% and 33% in 2014.
While its adjusted EBITDA margin improved to approximately 32% in 2013 from about 30% in 2012, due to the reduction of marketing expenses as a percentage of revenue, Moody's views that further significant improvements are unlikely, given the continued intense competition over Long Term Evolution (LTE)-Advanced and wideband LTE, despite regulatory interventions.
At the same time, Moody's expects SKT to continue to generate free cash flow (FCF) in 2014, due to the substantial completion of its LTE-related investments. Moody's estimates that SKT's adjusted FCF/debt improved to 5%-10% in 2013 from about -2% in 2012.
SKT's liquidity position will remain strong. As of 31 December 2013, the company retained about KRW1.8 trillion in cash-on-hand and short-term investments on a consolidated basis. In contrast, the company's short and current portion of long-term debt totaled about KRW1.5 trillion. It also retains strong access to the domestic and foreign capital markets.
Despite the improvement in SKT's financial profile and excellent liquidity, Moody's views SKT's management as having a high tolerance for risk, as demonstrated by its KRW3.4 trillion acquisition in 2012, of a 21.05% stake in SK Hynix Inc (Ba2 stable), a leading memory chip company. This acquisition was substantially debt funded and in our view is non-core and as a result weakened SKT's overall business risk profile.
Notwithstanding the inherent volatility of SK Hynix's semiconductor business, its operating and financial performance have recently improved due to the consolidation of the market for dynamic random access memory (DRAM).