SK Innovation
The author is an analyst of Shinhan Securities. He can be reached at jinmyung.lee93@shinhan.com -- Ed.
1Q23 operating profit to fall short at KRW145bn
SK Innovation is expected to have recorded operating profit of KRW145bn (positive swing QoQ) in 1Q23, missing the market consensus of KRW341.7bn. The refining division likely swung to a profit of KRW225.4bn, despite inventory valuation losses (KRW424.2bn) caused by oil price declines. Refining margins are estimated to have increased USD6/bbl QoQ on lower official selling prices of crude oil and stronger gasoline margins (+USD9/bbl).
The petrochemical division should also have turned to a profit of KRW68.2bn thanks to a 10% QoQ increase in the PX spread, despite weak olefin (PE/PP) spreads. Lubricants operating profit appears to have dropped to KRW209.5bn (-22% QoQ) on declines in sales volume and ASP.
Battery earnings to improve gradually from 1Q23 bottom
Battery sales are expected to have come to KRW2.8tr (-2% QoQ) as shipments fell due to Ford Motor’s production suspension of the F-150 Lightning electric pickup. Operating loss likely deepened QoQ, weighed down by one-off issues like production disruption at Ford and bonus payments, as well as rising fixed cost burden of US plants (low capacity utilization rates and production yields). We forecast the battery division to record operating loss of KRW856.2bn for 2023. A turnaround in earnings should materialize in 1Q24, but may come earlier in 3Q23 if it receives tax credits (KRW579bn) under the Inflation Reduction Act. Battery production capacity in the US is projected to increase from 22GWh in 2023 to 108GWh in 2025, with the portion in total capacity to rise from 24% to 45%. Expectations will gradually grow for earnings boost from the advanced manufacturing production credit (AMPC).
Retain BUY and raise target price by 9% to KRW240,000
We raise our target price for SK Innovation by 9% to KRW240,000 with changes made to the value of battery operations, which had not been fully reflected due to production disruptions at new plants continuing to weigh on profitability. Battery earnings could turn around faster than expected, given that US capacity utilization rates and production yields have started to improve in March and benefits are expected from the Inflation Reduction Act’s AMPC. With the removal of battery issues that had caused the stock to trade at a discount, we believe SK Innovation will move gradually higher.