SANTA MONICA, Calif.– Dalton Investments issued the following letter to the directors of SK Inc. (034730.KS) to encourage management to focus on increased share buybacks and cancelling of repurchased shares.
Letter to the Board of Directors and the Management of SK Inc.
April 6th, 2022
To: The Board of Directors and the Management of SK Inc.
Dalton Investments (“Dalton” or “we”), a US-based, long-term value-oriented investment management firm, has been investing in SK Inc. (“SK” or the “Company”) through funds and client accounts that it manages.
We highly commend the management of SK for its continued efforts to improve shareholder value. We genuinely appreciate the increasingly aligned interests between SK’s management and shareholders through stock-based compensations. Following such strong footing, SK has engaged in group-wide business portfolio re-imagination, double bottom line adoption and governance overhaul, to name just a few. While the market has not been giving much credit to these policies yet, we believe that SK has been one of the leaders in embracing and leading the push to a more sustainable future.
We believe that the recent announcement of shareholder return policy was another step in the right direction. However, we would like to add that SK should focus much more on share buybacks than on dividends, at the current, heavily-discounted valuation. Every $1 buying a share worth $2 or more will be much more value-accretive than static $1. Moreover, SK should strongly consider cancelling repurchased shares. The market is usually very hesitant to assign value when there is an overhang risk. One of the financial companies in Korea, in which Dalton is a shareholder, has shifted from dividends to share buybacks and cancellation and its share price has appreciated greatly. It is not easy to know whether a share buyback and cancellation program will result in an immediate and sustainable share price appreciation. However, that is fine, given that the continuing shareholders will be increasing their ownership of the company at a cheap valuation and at no additional cost to them. For example, Berkshire Hathaway has been able to increase ownership of Apple without any additional share purchases and its founder, Warren Buffett, praises the management of its invested companies when these companies buy back shares at low valuations.
SK is a growth company with strong and forward-looking business portfolio and yet has been experiencing severe valuation discount. This means that there is a double value drivers for the share buybacks: (i) due to the strong growth potential and (ii) due to the possible narrowing of the discount. Therefore, we believe that SK should be focused on significant buybacks while managing financial risks.
We believe there are many potentials to unlock the great and growing value of SK. Therefore, we wish to continue to have constructive discussions and improve value for all shareholders.
Thank you for your consideration.
Respectfully submitted,
James Lim
Partner, Senior Research Analyst
Dalton Investments