Fitch Affirms SKT, SKB at 'A-'; Outlook Remains Negative

SK Telecom Co

14/10/2019 08:12

(The following statement was released by the rating agency)


Fitch Ratings-Seoul-October 14: 

Fitch Ratings has affirmed South Korea-based SK Telecom Co., Ltd's (SKT) 
Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) and its 
senior unsecured rating at 'A-'. The agency has also affirmed its subsidiary SK 
Broadband Co., Ltd.'s (SKB) Long-Term Foreign- and Local-Currency IDRs and 
senior unsecured rating at 'A-'. The Outlook remains Negative.

The Negative Outlook reflects Fitch's expectation that SKT's financial leverage 
will remain at an elevated level of around 1.9x, which is above our negative 
rating guideline. This is also based on our view of the uncertainty over SKT's 
deleveraging capacity at the early stages of a new technology rollout. We will 
revise SKT's Outlook back to Stable should the company continue to show 
improvement in operating cash flow with robust 5G monetisation and sufficient 
cover for incremental capex. SKT's ratings also reflect the company's leading 
market position in Korea's oligopolistic telecom market and well-established 
network infrastructure. SKB's ratings and Outlook reflect its strong operational 
and strategic linkages with SKT.

Key Rating Drivers

Leverage Remains High: Fitch expects SKT's FFO adjusted net leverage ratio to 
stay high at around 1.9x in 2019 amid the progressive pace of its 5G network 
upgrade and lower operating margins due to increasing competition at the early 
stages of the 5G rollout. However, we forecast the company is likely to 
strengthen its balance sheet over the medium term due to improvements in its 
wireless operations and expansion in its non-telecom business. 

Capex to Peak in 2019: Korean telcos are leading their peers in 5G investments, 
which will be front-loaded as they build base stations to widen coverage and 
improve service quality. We estimate SKT's capex will increase to KRW4.2 
trillion, including annual spectrum payment of KRW425 billion in 2019 (2018: KRW 
3.3 trillion), and drop gradually from 2020. We also expect the investment 
period for the 5G upgrade to be longer than for the long-term evolution network 
because of the telcos' expansion strategy to deploy the 5G network in major 
cities rather than targeting nationwide coverage and the need for high-density 
base stations. All three Korean telcos plan to roll out their 5G networks in 85 
major cities by end-2019.

5G Leads ARPU Turnaround: The adoption of 5G telecom networks in Korea that is 
faster than our expectations is likely to lead to a rebound in wireless average 
revenue per user (ARPU) and revenue growth over the medium term. The diminishing 
yoy negative impact of a government-driven tariff cut in 2017 will also support 
the recovery of wireless operations. The ARPU improvement will be achieved 
mainly through the sale of more expensive 5G tariff plans as SKT has acquired 
around 1 million 5G subscribers during the first four months of rollout. 
However, an increase in marketing costs due to intensified competition may 
weaken SKT's short-term profitability. 

Solid IPTV Growth: Fitch expects SKT's subsidiary, SKB, to continue expanding 
its market share in the pay-TV market by bundling its internet-protocol 
television (IPTV) offerings with SKT's telecom services. Rising revenue from the 
segment will sufficiently offset the contraction in fixed-line voice revenue. 
Revenue from pay-per-view television, home shopping and advertising should also 
rise in tandem with the increase in IPTV subscribers and lead to margin 
expansion. SKB's acquisition of Korea's second-largest cable-TV operator, TBroad 
Co., Ltd, will also solidify the company's position in the pay-TV market. We 
forecast IPTV revenue will continue to grow by high-single digits in the short 
term.

Diversifying Operating Cash Flows: Improvement in SKT's non-core operations such 
as security services and e-commerce business increasingly contributes to the 
company's overall profit generation and diversifies revenue sources. SKT's 
security business, ADT Caps Co., Ltd, has a stable and recurring revenue base, 
solid operating margins and a strong market position as the second-largest 
operator in the Korean security-systems market. The company's e-commerce 
business, 11st Co., Ltd, is also the largest player in terms of monthly unique 
visitors and started to generate operating profit in 1Q19.

SKB Equalised with SKT: The relationship between SKB and its parent is close 
enough to align their ratings under Fitch's Parent and Subsidiary Rating Linkage 
criteria. SKB's fixed-line operation is of great importance to SKT's market 
position, particularly with respect to its ability to compete with other 
integrated operators, such as KT Corporation (A/Stable) and LG Uplus 
Corporation. In addition, SKT would face reputational risk should SKB fail. 
Therefore, Fitch believes SKT is highly likely to provide financial assistance 
to SKB, if required.

Derivation Summary

SKT has a strong market position as the country's largest wireless operator with 
around 47% market share and the second-largest fixed-line operator after KT 
Corporation in the oligopolistic Korean telecom market. We believe SKT's credit 
profile is weaker than that of KT on higher leverage. This is largely because 
its wireless operation has been negatively affected by the government-driven 
tariff cut to a greater degree than KT due to its larger mobile subscriber base. 
In addition, the acquisition of its debt-heavy security-service company put 
further pressure on SKT's near-term leverage. We forecast SKT's FFO adjusted net 
leverage ratio will be around 1.9x versus KT's 1.3x in 2019.

Compared with other telecom peers rated 'A' in the APAC region such as Singapore 
Telecommunications Limited (A+/Negative, standalone: A/Negative), SKT's 
operating EBITDAR margins are generally lower due to higher marketing costs, an 
unfavourable regulatory environment, lack of geographic diversification and 
declining fixed-line telephony as well as wireless services. However, this is 
partly offset by SKT's more conservative balance sheet with lower financial 
leverage than its peers even after the negative impact from the tariff cut. We 
believe the fast penetration of 5G services will help SKT's credit profile 
become more in line with an 'A-' rating over the medium term.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Consolidated revenue to increase by a mid-single digit in 2019, mainly due to 
the impact of the full consolidation of Life Securities Holdings (holding 
company of ADT Caps Co., Ltd). Revenue growth will also be helped by continuous 
growth in the media business offsetting the weak wireless operations.

- Operating EBITDAR margin to remain flat as a profit contraction in wireless is 
offset by the improving IPTV, security and e-commerce businesses.

- Capex to increase to around KRW4.2 trillion (cash basis, including annual 
spectrum fee of KRW425 billion) in 2019 (2018: KRW3.3 trillion) 

- Dividend payment remains largely the same as in previous years.

RATING SENSITIVITIES

SK Telecom Co., Ltd

Developments That May, Individually or Collectively, Lead to a Revision of the 
Outlook to Stable

- FFO adjusted net leverage below 1.8x on a sustained basis (2018: 1.9x)

Developments That May, Individually or Collectively, Lead to Negative Rating 
Action

- FFO adjusted net leverage over 1.8x on a sustained basis

- Negative pre-dividend free cash flow on a sustained basis

SK Broadband Co., Ltd.

Developments That May, Individually or Collectively, Lead to Negative Rating 
Action Include:

- An indication of weaker ties or a negative rating action on SKT

Developments That May, Individually or Collectively, Lead to Positive Rating 
Action Include:

- A positive rating action on SKT

Liquidity and Debt Structure

Solid Liquidity: SKT's liquidity has been stable as cash and cash equivalents, 
including short-term investments of KRW2.2 trillion, were sufficient to cover 
short-term obligations of KRW1.2 trillion, including short-term debt and current 
portion of long-term debt, as of end-June 2019. The company had unused credit 
lines of KRW430 billion from mostly domestic banks as of end-June 2019. SKT's 
liquidity profile is also helped by its ready access to capital markets when in 
need of external financing as one of the country's major telecom operators and 
the main affiliate of the SK Group, one of the country's biggest conglomerates.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit 
relevance is a score of 3 - ESG issues are credit neutral or have only a minimal 
credit impact on the entity, either due to their nature or the way in which they 
are being managed by the entity.

For more information on our ESG Relevance Scores, visit 
www.fitchratings.com/esg.

SK Telecom Co., Ltd; Long Term Issuer Default Rating; Affirmed; A-; RO:Neg

; Local Currency Long Term Issuer Default Rating; Affirmed; A-; RO:Neg

----senior unsecured; Long Term Rating; Affirmed; A-

SK Broadband Co., Ltd.; Long Term Issuer Default Rating; Affirmed; A-; RO:Neg

; Local Currency Long Term Issuer Default Rating; Affirmed; A-; RO:Neg

----senior unsecured; Long Term Rating; Affirmed; A-

Contacts: 

Primary Rating Analyst

Shelley Jang, 

Director

+822 3278 8370

Fitch Australia Pty Ltd, Korea Branch

9F Kyobo Securities Building 97 Uisadang-daero, Youngdeungpo-gu

Seoul 07327

Secondary Rating Analyst

Jeong Min Pak, 

Senior Director

+822 3278 8360

Committee Chairperson

Stephen Durose, 

Managing Director

+61 2 8256 0307

 

Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@thefitchgroup.com; Yee Man Ko, Hong Kong, Tel: +852 2263 9953, Email: 
alanis.ko@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Hybrids Treatment and Notching Criteria (pub. 09 Nov 2018)

https://www.fitchratings.com/site/re/10051058

Corporate Rating Criteria (pub. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10024585

Country-Specific Treatment of Recovery Ratings Criteria (pub. 18 Jan 2019)

https://www.fitchratings.com/site/re/10058988

Parent and Subsidiary Rating Linkage (pub. 27 Sep 2019)

https://www.fitchratings.com/site/re/10089196

Sector Navigators (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023790

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10095527

Solicitation Status 

https://www.fitchratings.com/site/pr/10095527#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: 
HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING 
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S 
PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND 
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF 
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, 
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF 
CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE 
AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE 
PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD 
PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED 
IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS 
ISSUER ON THE FITCH WEBSITE.

Copyright © 2019 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its 
subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, 
(212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or 
in part is prohibited except by permission. All rights reserved. In issuing and 
maintaining its ratings and in making other reports (including forecast 
information), Fitch relies on factual information it receives from issuers and 
underwriters and from other sources Fitch believes to be credible. Fitch 
conducts a reasonable investigation of the factual information relied upon by it 
in accordance with its ratings methodology, and obtains reasonable verification 
of that information from independent sources, to the extent such sources are 
available for a given security or in a given jurisdiction. The manner of Fitch's 
factual investigation and the scope of the third-party verification it obtains 
will vary depending on the nature of the rated security and its issuer, the 
requirements and practices in the jurisdiction in which the rated security is 
offered and sold and/or the issuer is located, the availability and nature of 
relevant public information, access to the management of the issuer and its 
advisers, the availability of pre-existing third-party verifications such as 
audit reports, agreed-upon procedures letters, appraisals, actuarial reports, 
engineering reports, legal opinions and other reports provided by third parties, 
the availability of independent and competent third- party verification sources 
with respect to the particular security or in the particular jurisdiction of the 
issuer, and a variety of other factors. Users of Fitch's ratings and reports 
should understand that neither an enhanced factual investigation nor any 
third-party verification can ensure that all of the information Fitch relies on 
in connection with a rating or a report will be accurate and complete. 
Ultimately, the issuer and its advisers are responsible for the accuracy of the 
information they provide to Fitch and to the market in offering documents and 
other reports. In issuing its ratings and its reports, Fitch must rely on the 
work of experts, including independent auditors with respect to financial 
statements and attorneys with respect to legal and tax matters. Further, ratings 
and forecasts of financial and other information are inherently forward-looking 
and embody assumptions and predictions about future events that by their nature 
cannot be verified as facts. As a result, despite any verification of current 
facts, ratings and forecasts can be affected by future events or conditions that 
were not anticipated at the time a rating or forecast was issued or affirmed. 

The information in this report is provided "as is" without any representation or 
warranty of any kind, and Fitch does not represent or warrant that the report or 
any of its contents will meet any of the requirements of a recipient of the 
report. A Fitch rating is an opinion as to the creditworthiness of a security. 
This opinion and reports made by Fitch are based on established criteria and 
methodologies that Fitch is continuously evaluating and updating. Therefore, 
ratings and reports are the collective work product of Fitch and no individual, 
or group of individuals, is solely responsible for a rating or   a report. The 
rating does not address the risk of loss due to risks other than credit risk, 
unless such risk is specifically mentioned. Fitch is not engaged in the offer or 
sale of any security. All Fitch reports have shared authorship. Individuals 
identified in a Fitch report were involved in, but are not solely responsible 
for, the opinions stated therein. The individuals are named for contact purposes 
only. A report providing a Fitch rating is neither a prospectus nor a substitute 
for the information assembled, verified and presented to investors by the issuer 
and its agents in connection with the sale of the securities. Ratings may be 
changed or withdrawn at any time for any reason in the sole discretion of Fitch. 
Fitch does not provide investment advice of any sort. Ratings are not a 
recommendation to buy, sell, or hold any security. Ratings do not comment on the 
adequacy of market price, the suitability of any security for a particular 
investor, or the tax-exempt nature or taxability of payments made in respect to 
any security. Fitch receives fees from issuers, insurers, guarantors, other 
obligors, and underwriters for rating securities. Such fees generally vary from 
US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In 
certain cases, Fitch will rate all or a number of issues issued by a particular 
issuer, or insured or guaranteed by a particular insurer or guarantor, for a 
single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 
(or the applicable currency equivalent). The assignment, publication, or 
dissemination of a rating by Fitch shall not constitute a consent by Fitch to 
use its name as an expert in connection with any registration statement filed 
under the United States securities laws, the Financial Services and Markets Act 
of 2000 of the United Kingdom, or the securities laws of any particular 
jurisdiction. Due to the relative efficiency of electronic publishing and 
distribution, Fitch research may be available to electronic subscribers up to 
three days earlier than to print subscribers. 

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd 
holds an Australian financial services license (AFS license no. 337123) which 
authorizes it to provide credit ratings to wholesale clients only. Credit 
ratings information published by Fitch is not intended to be used by persons who 
are retail clients within the meaning of the Corporations Act 2001

Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange 
Commission as a Nationally Recognized Statistical Rating Organization (the 
"NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on 
Item 3 of Form NRSRO and as such are authorized to issue credit ratings on 
behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other 
credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and 
therefore credit ratings issued by those subsidiaries are not issued on behalf 
of the NRSRO. However, non-NRSRO personnel may participate in determining credit 
ratings issued by or on behalf of the NRSRO