Battery Loss Widening Due to Higher Metal Prices
The authors are analysts of Shinhan Investment Corp. They can be reached at jinmyung.lee93@shinhan.com and cgh815@shinhan.com, respectively. -- Ed.
2Q22 OP to exceed consensus at KRW2.16tr (+31% QoQ)
SK Innovation is expected to have registered operating profit of KRW2.16tr (+31% QoQ) for 2Q22, beating the consensus estimate of KRW1.47tr. Refining operating profit likely reached KRW1.93tr (+28% QoQ) thanks to inventory valuation gains of about KRW500bn deferred from 1Q22 and strong refining margins. Complex margins increased sharply to USD20/bbl (+USD9 QoQ), even when considering Saudi Arabia’s official selling price (OSP) hikes. Kerosene, diesel, and gasoline margins also rose to record-high levels, driving growth in refining margins.
Petrochemical/lubricant profits to grow, but widening battery loss
The petrochemical division’s 2Q operating profit should have jumped 239% QoQ to KRW105.7bn despite weaker polymer (PE/PP) spreads, backed by a steep upturn in spreads of aromatics products (PX, BTX, etc.). PX and benzene spreads went up by 79% and 77% QoQ, respectively. The lubricant division is projected to have recorded operating profit of KRW235.8bn (+11% QoQ), with spreads rising 3% QoQ on tight supply of lube base oils.
The battery division likely suffered operating loss of KRW321.3bn despite expanding sales. The loss widened QoQ due to higher metal prices and growing burden of fixed costs of new plants in the US and Hungary. Battery shipment disruptions at the Hungarian plant, in particular, appear to have hurt sales volume and added to costs.
Retain BUY and lower target price to KRW270,000
We lower our target price for SK Innovation to KRW270,000, based on downward revision of battery earnings forecasts and valuation multiples from growing market discounts. The shares have been on a downtrend since June, despite robust refining earnings supported by strong refining margins. Investor sentiment is negative because of concerns over the battery business (delayed pre-IPO, deteriorating profitability, etc.). However, we retain our BUY rating as solid earnings are expected from mainstay operations in 2H22 and the battery business should recover gradually.