The author is an analyst of NH Securities and Investment. He can be reached at yk.choi@nhqv.com. — Ed.
SK Innovation will likely report disappointing 4Q22 earnings. Although we lower our earnings estimates, we believe that the firm will achieve gradual OPM improvement down the road. SK On should turn to profit in 2023.
Expectations for gradual OPM improvement look valid
We lower our TP on SK Innovation by 8% from W250,000 to W230,000, to reflect downward adjustments to our EBITDA and multiple assumptions for SK On. Considering its slower-than-expected pace of margin improvement, we trim our OPM forecasts for SK On from 1.5% to 0.8% for 2023 and from 4.0% to 3.5% for 2024. We also cut our applied EV/EBITDA multiple from 17x to 16x, in consideration of sluggish share price performances for battery players. However, backed by: 1) rising utilization rates at new factories; and 2) production yield improvement at overseas plants, SK Innovation should achieve gradual OPM improvement. In line, we adhere to a Buy rating.
4Q22 preview: Earnings sapped by oil price and dollar weakening, and operation of new battery plant
SK Innovation is to post 4Q22 sales of W21.1tn (-7% q-q) and operating loss of W458.7bn (TTL q-q; OPM of -2.2%), missing consensus by a large margin.
[Petroleum] At the petroleum division, 4Q22 sales are forecast at W14.1tn (-11% q-q) and operating loss at W535.1bn (TTL q-q; OPM of -3.8%). Solid refining margins were likely offset by: 1) negative lagging effects from oil price and dollar decline; 2) greater inventory valuation losses; and 3) a higher OSP.
[Chemical] The chemical division should post sales of W2.5tn (-2% q-q) and operating loss of W9.3bn (TTL q-q; OPM of -0.4%), dampened by a downturn of product spreads, including a 19.6% q-q plunge in the PX spread.
[Lubricant] The lubricant division is forecast to book sales of W1.2tn (-13% q-q) and OP of W245.3bn (-27% q-q; OPM of 19.9%). Profitability likely declined q-q as sales volume contracted amid off-seasonality.
[Battery] The battery division should book 4Q22 sales of W2.8tn (+28% q-q) and operating loss of W224.5bn (loss widening; OPM of -8.0%). Margins deteriorated as depreciation cost increased in relation to the earlier-than-planned commercial operation start at the Georgia (US) plant #2 (originally planned to start in 1Q23). That said, as initial operation cost has already been reflected, the divisional margins should gradually improve from 1Q23.
