Amid Continuing Virtuous Cycle of Investment
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Solid fundamentals reinforced by its role as a ‘professional value investor’ are expected to sustain at SK Inc throughout 2022 on both the reinforcement of new growth portfolios centered on four major businesses and the enhancement of shareholder value through stable holding company cash flow and robust ROI. SK Inc shares are trading at a 61% discount to NAV.
Offering business portfolio growth and strengthening shareholder return
SK Inc has four major businesses: high-tech materials (semiconductor materials, power/compound semiconductors, battery materials), bio (pharmaceuticals, CDMO (consignment production of pharmaceuticals)), green (alternative energy, sustainable food, environmental technology, CO2 treatment), and digital. Since the announcement of mid/long-term growth plans centered on these four main areas, the firm has continued to invest in each sector with efficient asset allocation. In 3Q22, SK Inc and SK Innovation invested US$250mn in Tera Power, a US SMR firm. Also, SK Inc and SK Energy acquired the management rights of Atom Power (US energy solutions company) for US$150mn.
In accordance with the mid/long-term shareholder return policy reinforcement plan announced in March (considering purchase and cancellation of treasury stocks of 1% or more annually until 2025), the company is acquiring W200bn worth of treasury stock over six months from September. SK Inc has purchased about W33bn-worth (158,000 shares, 0.2%) thus far.
We lower our TP from W400,000 to W350,000 while maintaining a Buy rating. Our TP update reflects a change in valuation base year (2022E → 2023F) and the share price adjustments of listed subsidiaries.
3Q22 preview: Healthy earnings momentum to continue
SK Inc should log solid 3Q22 earnings with sales of W32.648tn (+28% y-y) and OP of W2.814tn (+81% y-y).
Strong earnings likely continued at SK E&S at the level seen in 1H22 (OP of W507bn, +280% y-y), thanks to: 1) the rebound in system marginal price (SMP; W194/kWh, +106% y-y) to a record-high quarterly average in 3Q22; and 2) the absence of repair and maintenance works despite off-seasonality. Accordingly, SK Inc’s dividend income for 2022 should climb. In addition, both the pace of earnings growth and profitability likely improved at SK Pharmteco on the normalization of sales delayed from the previous quarter.