SK Inc
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com -- Ed.
SK Inc is expected to maintain solid fundamentals as a ‘professional value investor’ by reinforcing new growth portfolios centered upon four major businesses and by strengthening shareholder value via stable holding company cash flow and successful return on investment. Its shares are trading at a 65% discount to NAV.
Strong cash flow and strengthening shareholder return
Since its announcement of mid/long-term growth plans centered upon four main growth areas: high-tech materials, bio, green, and digital, SK Inc has continued to invest in each sector with efficient asset allocation. In 2023, SK Inc’s cash flow is expected to be good thanks to an increase in dividend income from SK E&S (W261.0bn (2022) → W481.6bn (2023)) and the possibility of selling existing stakes in foreign-invested companies.
Before and after its 2023 shareholders’ meeting, SK Inc and major subsidiaries announced plans to strengthen shareholder value. In detail, SK Inc decided to retire treasury shares, which account for 1% of total shares. Later, there appears to be a rising possibility the company will retire some existing treasury shares (24.6%) and additional treasury shares (at least 3%) to be acquired by 2025. Share prices of major subsidiaries are expected to rise (a factor contributing to SK Inc’s NAV expansion) as subsidiaries strengthen shareholder value. In addition, the company’s discount rate compared to NAV is expected to decrease.
Although keeping a Buy rating, we lower our TP from W350,000 to W260,000, reflecting changes in the multiple applied to operating value (EV/EBITDA 9.3x → 8.2x), fluctuations in listed subsidiaries’ share prices, and an increase in target discount to NAV (35% → 45%) following lowered earnings forecasts.
1Q23E: Earnings to arrive sluggish y-y
Although we believe that SK Inc’s 1Q23 earnings escaped from the previous quarter’s operating losses, they will should prove sluggish y-y, with sales of W31,319bn (+2% y-y) and OP of W610bn (-80% y-y).
We attribute these likely tepid results to both shipment delays at the battery division (SK Innovation) and one-off factors. Despite a strong system marginal price (SMP) during the peak season (W237/kWh, +31% y-y), SK E&S’s earnings (1Q23E OP of W225.1bn, -65% y-y) were likely hampered by the application of the SMP cap in January-February. But, earnings for SK Materials CIC and SK Siltron should come in solid thanks to stable long-term contracts, expansion of high value-added new products, and rising ASPs.