SK Gas
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com -- Ed.
SK Gas is forecast to log consensus-beating 1Q23 OP, helped by steadily improving business conditions at the LPG trading division. As for the two projects in Ulsan, for which SK Gas has long been preparing, operations are to kick off in earnest from 2024—a development that should help to level up the firm’s margin growth.
Earnings growth anticipated
We maintain a Buy rating and TP of W150,000 on SK Gas, as we expect the firm to achieve margin growth for its existing and new businesses from 2024, backed by: 1) LPG trading margin expansion; 2) full-fledged operations at Ulsan GPS; and 3) the potential of the KET LNG Terminal venture. We estimate pre-tax profit for 2025 at W415bn, up by W100bn or more from the expected 2023 level, thanks to a full-fledged start of new projects.
That said, natural gas prices have declined since 1Q23, with natural gas demand shrinking in Europe amid warm winter weather. In line, the LNG/LPG-related trading opportunities that were available last year are unlikely to be as abundant. As for LPG, although LPG prices are 10% lower than LNG prices, related profits are forecast to narrow, depending on the level of natural gas prices. In detail, LNG prices are projected to remain stable through the summer season, in light of solid inventory levels and off-seasonality. However, upon the arrival of winter, price volatility could expand, depending on temperature levels.
Existing businesses remain strong ahead of sales expansion for new ventures
We forecast 1Q23 sales of W1.8tn (-22% y-y), OP of W132.4bn (+25% y-y), and pre-tax profit of W154.6bn (-16% y-y). Expectations for consensus-beating earnings are attributed to: 1) margin expansion at the LPG trading division, helped by strong LPG prices (vs LNG prices); and 2) increased sales of industrial LPG.
For 2023, we anticipate that pre-tax profit will remain similar y-y at W323.1bn (+6% y-y). For reference, as derivatives-related profits and gains are essential for LPG businesses, pre-tax NP is more important than OP for SK Gas. Trading at a 2023E P/E of 5x, the firm’s shares boast strong valuation merit