The author is an analyst for Shinhan Securities. He can be reached at jinmyung.lee93@shinhan.com -- Ed.
3Q OP of KRW1.56tr (positive swing QoQ) beats consensus
SK Innovation turned positive QoQ in 3Q23 and registered operating profit of KRW1.56tr, beating the KRW1.05tr consensus. The refining division turned around with an operating profit of KRW1.1tr, owing to inventory valuation gains (KRW414.9bn) from higher oil prices and an upturn in refining margins (+USD7/bbl). The petrochemical division’s operating profit reached KRW237bn (+39% QoQ) on strong inventory valuation gains, despite the decline in price spreads of major products. The lubricant division saw profit growth (+1% QoQ) with positive inventory effects making up for the dip in sales and weak spreads.
Battery sales were down 14% QoQ to KRW3.2tr, hit by ASP declines from falling metal prices and shipment disruptions to a certain client on weak demand. The battery division was able to narrow losses with production yields improving at new plants (including in the US) and larger benefits (KRW209.9bn) secured from the Advanced Manufacturing Production Credit (AMPC).
4Q OP to reach KRW1.2tr on solid main biz and SK On’s turnaround
In 4Q23, SK Innovation is forecast to record operating profit of KRW1.2tr (-23% QoQ). Refining operating profit is projected at KRW675.8bn (-40% QoQ) in the absence of inventory gains seen in 3Q23. Oil prices are expected to remain at high levels amid tight supply. Refining margins should once again face increasing upward pressure with demand rising for kerosene, diesel, and jet fuel during winter amid low inventory levels. Earnings from petrochemicals and lubricants should inevitably drop from a quarter earlier without one-off gains, but still come in decent backed by solid PX and lube base oil spreads.
SK On, the company’s battery-making subsidiary, is expected to see a slight QoQ dip in sales, with ASP likely falling despite increased shipments to the US. But it is set to deliver its first-ever profit in quarterly earnings thanks to: 1) improving productivity at the US plant; 2) enhanced cost efficiency; and 3) AMPC benefits worth KRW222.9bn. Yet, volatility in shipments to a certain client caused by weak EV demand should remain as a risk factor.
Retain BUY for a target price of KRW210,000
We maintain our BUY rating on SK Innovation and keep our target price unchanged at KRW210,000. The share price has recently plunged to a three- year low, pulled down by mounting concerns over the EV industry and the continued weakness in SK On’s profitability. However, we believe discount factors that have weighed on the battery business should gradually dissipate, as an earnings turnaround is in sight with production yields improving at the new plants. On top of brisk earnings from the mainstay oil refining business amid an upturn in market conditions, shares are poised to turn to an uptrend going forward.