Restructuring to Gain Traction from 2022
The author is an analyst of KB Securities. He can be reached at yc.baek@kbfg.com. -- Ed.
Raise target price to KRW420,000
We maintain BUY on SK innovation and raise our TP by 5.0% to KRW420,000 to reflect upward revisions to 2021E/2022E NP (attributable to controlling interests) of 0.6%/12.6% based on:
(1) growing Refining profits (i.e., rising complex refining margins) and
(2) improving Batteries earnings.
Our TP represents 33.4x 12m fwd implied P/E, 2.29x P/B.
3Q21 earnings to beat market consensus
For 3Q21, we forecast revenue/OP at KRW12tn (+42.6% YoY, +7.9% QoQ)/KRW504.0bn (turn to black YoY, -0.5% QoQ), which is above the market consensus of KRW449.2bn (Sep 23; FnGuide). Refining revenue/OP should come in at KRW7.75tn (+7.0% QoQ)/KRW151.4bn (-35.1% QoQ), with OP eroding QoQ on shrinking inventory-related gains, but complex refining margin should be flat QoQ and spot margin should improve. Overall, market conditions for petroleum products appear to have improved QoQ. As for Batteries, we expect revenue/OP of KRW819.3bn (+30.0% QoQ)/-KRW63.0bn (loss narrows QoQ). Our profitability outlook has improved because of increasing supplies for the Hyundai EV Ioniq 5 and higher production yield/utilization in China.
Restructuring to gain traction from 2022
We see earnings continuing to improve in 2022 with revenue/OP of KRW53.67tn (+18.6% YoY)/KRW2.25tn (+19.8% YoY) largely fueled by a turnaround at Batteries, of which 2022 revenue/OP should come in at KRW6.06tn (+86.1% YoY)/KRW72.7bn (turn to black YoY). Growing supply volume fueled by robust new orders coupled with rising yields/utilization at new factories should catalyze revenue growth and subsequently turn the battery business profitable. Overall, the company’s transition to batteries should gain traction from 2022, as: (1) the battery business should soon turn profitable for the first time (10 years since EV battery unit was launched) and (2) OP from new businesses (e.g., batteries, SKIET) should grow to KRW333.4bn, which would be 14.8% of company-wide OP.