Battery Division Likely to Post Sales Growth of 117% YoY
The author is an analyst of Shinhan Investment Corp. He can be reached at jinmyung.lee93@shinhan.com. -- Ed.
1Q20 preview: Operating loss to miss consensus at KRW894bn
SK Innovation is forecast to have posted an operating loss of KRW894bn (negative swing QoQ, YoY) for 1Q20, missing the market consensus of a KRW725.5bn loss. The main culprit will be the refining division which likely incurred a sizable loss of KRW961.7bn (negative swing QoQ). Large inventory valuation loss is expected on plunging oil prices. The one-month lagging refining margin fell USD9.6/bbl. Despite a small increase in product spreads, petrochemical operating profit should have come to KRW79.8bn (+KRW72.4bn QoQ, one-off costs booked in 4Q19) due to falling demand amid the COVID-19 pandemic. Lubricant operating profit should have dipped 17% QoQ to KRW71.8bn on Bunker C price hike and lube base oil price drop.
2020 forecast: Operating loss of KRW1.02tr in 1H vs. profit of KRW867.6bn in 2H
For 2Q20, we forecast the refining division to post an operating loss of KRW220.1bn on inventory loss with oil prices staying around USD20/bbl levels. Refining margins are projected to gain USD6.4/bbl HoH in 2H20, given Saudi Arabia’s official selling price (OSP) cuts for crude oil from 2Q20. Refining operating profit should reach KRW640.6bn in 2H20 (vs. KRW1.2tr loss in 1H20) on demand upturn after the pandemic wanes.
For full-year 2020, SK Innovation is expected to see an operating loss of KRW156bn (negative swing YoY) hit by huge losses from refining in 1H20. The secondary battery division will likely post sales growth of 117% YoY with the ramp-up of a plant in Hungary in 2H20, but deeper operating loss on initial costs from the investment.
Retain BUY for a target price of KRW120,000
We retain our BUY rating on SK Innovation for a target price of KRW120,000. Sluggish earnings are inevitable in the first half of the year due to low oil prices and weak demand. However, the refining market and oil prices are now passing the trough. We expect oil supply and demand conditions to improve from June on the back of the OPEC+ group’s production cut agreement in May and natural reduction in US oil output. The surge in coronavirus cases in developed countries should slow gradually after peaking in April. Oil prices and demand should rebound heading toward 2H20. We expect earnings to turn around in 2H20 on OSP cuts and refining margin improving upon demand upturn.