- The board of SK Chemicals (285130 KS Equity; 285130.KS) seems unconcerned with its shares trading at an 83% discount to net asset value. In Metrica’s view, the board has a fiduciary duty to care about its share price.
- The company should address the discount by selling a stake in its subsidiary SK Bioscience (302440 KS Equity; 302440.KS) upon the IPO lock-up expiry of 18 September and distributing the proceeds to shareholders.
- SK Chemicals can pay a special dividend of 1.3x its share price while still retaining 50% ownership in SK Bioscience as well as 100% ownership of its profitable chemical and pharmaceutical businesses.
Metrica Partners Pte. Ltd. is today sending the letter below to SK Chemicals’ board of directors.
Metrica is also uploading this letter to a dedicated website – https://sk-shareholders.com – along with a presentation exploring the issues in more depth.
Current and prospective shareholders and other interested parties are encouraged to sign up for the mailing list at https://sk-shareholders.com/subscribe to receive further updates.
The Board of Directors
SK Chemicals Co., Ltd.
310, Pangyo-ro, Bundang-gu, Seongnam-si, Gyeonggi-do, 13494 Korea
Attention: Mr. Moon Sung-Hwan, Chairman
8 September, 2021
Dear Members of the Board,
We are writing to you on behalf of multiple funds managed or advised by Metrica Partners Pte. Ltd. (“Metrica”) which own shares in SK Chemicals.
The reason for writing to you today is that we have become increasingly concerned about the disconnect between SK Chemicals’ share price and its underlying value, which has reached an extreme level.
According to Metrica’s analysis, your 68.43% stake in SK Bioscience is worth ₩1,492,653 per share1. Your other businesses, including net cash, are worth ₩98,350 per share, based on an average of the recent securities company reports on your website. This adds up to a total company value of ₩1,591,003 per share.
Against this, your current share price of ₩278,000 represents an 83% discount, which is an embarrassing indictment of the company’s governance in Metrica’s opinion.
You might be asking why the board should be concerned about the share price. Some boards take the view that their role is limited to overseeing the smooth running of the business on behalf of the shareholders, and that the determination of the appropriate share price should be left wholly to the markets.
In Metrica’s view however, boards have a fiduciary duty to care about the share price. Simply put, a higher share price lowers the company’s cost of capital, and it also lowers the cost of transacting value-accretive acquisitions of other businesses. Both of these are demonstrably positive for shareholder value which is unarguably a concern of every company board.
In any case, the independent (non-SK Group-affiliated) shareholders of SK Chemicals, including funds managed or advised by Metrica, very much care about the share price.
SK Chemicals does not need to maintain a 68.43% stake in SK Bioscience, in Metrica’s view. The stake so completely dominates SK Chemicals’ valuation that it renders the other businesses (chemicals, pharmaceuticals) totally insignificant.
Metrica therefore urges SK Chemicals to partially sell down its SK Bioscience stake upon the expiry of the share lockup on 18 September.
Metrica proposes that SK Chemicals sell an 18.3% stake for proceeds of ₩4.2 trillion (assuming a 10% discount to market), leaving SK Chemicals with 50.1% ownership of its subsidiary and the ability to pay a special dividend to shareholders of ₩357,000 per share, which is 1.3x the current share price of ₩278,000.
This would be very positive for shareholder value as it would result in a pay-out to shareholders greater than the current share price while retaining majority control of a flagship vaccine business and full ownership of profitable green chemicals and pharmaceuticals businesses.
There should be no reasonable objections to selling. SK Chemicals was happy to sell SK Bioscience shares during the IPO at ₩65,000. The board should be ecstatic now that, six months later, they can sell at ₩335,000, which is 5.2x higher.
Nevertheless, Metrica recognises that circumstances may have changed such that the board now sees further upside in SK Bioscience’s shares. If so, SK Chemicals should then buy back its own shares in the market, as this would increase the exposure to SK Bioscience at a very large discount. This would also be very positive for shareholder value at SK Chemicals.
SK Chemicals must practise what it preaches. Its website states that “[t]he company shall increase its own value so that the value of shareholders can be created, and to this end, it shall enhance transparency and conduct efficient management2.” It also states that “[t]he Company shall maximize its corporate value through transparent and efficient management and constant innovation and share the results with shareholders3.”
Metrica trusts that the board will take its proposals seriously and recognise that Metrica is not alone in holding these views.
Metrica will not sell its funds’ shares in SK Chemicals (subject to the funds’ mandates and capacities), nor will it cease its campaign for better governance at SK Chemicals, until SK Chemicals’ board has addressed the above issues, or until the share price fairly reflects the underlying value.
Damian L. Edwards
Chief Investment Officer
Metrica Partners Pte. Ltd.
About Metrica Partners Pte. Ltd.:
Metrica Partners Pte. Ltd. is a Singapore-based investment management company, founded in 2016 by Damian L. Edwards and David Mulvenna.
As an independent firm not subject to the conflicts of interest often found at other investment managers, Metrica regularly exercises its right to makes public proposals to its investee companies. These proposals take the form of concrete, actionable steps aimed at improving corporate governance and boosting shareholder value. Metrica intends its recommendations to produce higher returns for investors, including pension funds that manage the retirement assets of Korean citizens.
More information is available at https://metricapartners.com.
1 Prices as of 3 September, 2021.
2https://www.skchemicals.com/en/ESG/esg_13.aspx, Metrica’s emphasis.
3https://www.skchemicals.com/en/ESG/esg_13.aspx, Metrica’s emphasis.