The author is an analyst for Shinhan Securities. He can be reached at yjjung86@shinhan.com -- Ed.
3Q23 OP decent at KRW7.8bn (positive swing YoY, +754% QoQ)
SK IE Technology posted operating profit of KRW7.8bn (positive swing YoY, +754% QoQ) on sales of KRW182.2bn (+35% YoY, +20% QoQ) for 3Q23, beating market consensus of KRW7.4bn by 7%. Improvement in company- wide earnings was driven largely by an upturn in earnings from the LiBS (lithium-ion battery separator) business, which recorded operating profit of KRW12.5bn (positive swing YoY, +119% QoQ) on sales of KRW181.2bn (+35% YoY, +18% QoQ). Operating margin from LiBS improved to the 7% range as the top-line boost from a 20% QoQ jump in shipments at steady ASP levels more than offset the rise in costs from regular maintenance work. Meanwhile, new businesses including flexible cover windows remained in the red at an operating loss of KRW4.7bn in 3Q23. While keeping an eye on losses, the company is continuing its search for new growth engines such as carbon capture technology, eco-friendly materials and solid electrolytes.
Cautious stance on capex spend contributes to margin improvement
The company registered poor margins in 2021-2022 as its aggressive capex expansion in Europe was only met with weak demand and fierce market competition. As a result, SK IE Technology shifted to a conservative and flexible stance on capex projects in the US, Poland and other overseas markets. In the US, amid growing investor interest following the announcement of the Inflation Reduction Act (IRA), we note a shift in the company's capex strategy from aggressive, preemptive investment to optimized investment upon actual order intake regardless of IRA benefits.
The strategic shift to a cautious stance on capex spend served the company well as market concerns continued to grow over a slowdown in electric vehicle (EV) demand in 2H23 through 2024. With capacity utilization rates kept steady and costs on a decline, the company emerged as one of the very few secondary battery materials suppliers to secure margins gains in 3Q23.
Retain BUY for a target price of KRW95,000
We maintain our BUY rating on SK IE Technology for an unchanged target price of KRW95,000, based on 2025F EBITDA and a target EV/EBITDA in the 15x range. The company’s share valuation burden has eased with the confirmation of a steady uptrend in earnings. SK IE Technology's defensive capex spend and steady earnings improvement should rise in importance as concerns over weak EV demand continue to grow.