SK Innovation: Refining Shines in 1H and Battery in 2H

The authors are analysts of Shinhan Investment Corp. They can be reached at [email protected] and [email protected], respectively. — Ed.

2Q22 OP beats consensus at KRW2.3tr (+41% QoQ)

SK Innovation posted operating profit of KRW2.3tr (+41% QoQ) for 2Q22, beating the consensus estimate of KRW1.6tr. Refining operating profit reached a new quarterly high of KRW2.2tr (+48% QoQ) thanks to strong refining margins (+USD9/bbl QoQ) and inventory valuation gains (+KRW179bn QoQ), driving overall earnings growth. Petrochemical operating profit soared 144% QoQ to KRW76bn despite the weak olefin spread, owing to a steep upturn in spreads of aromatics products (PX, etc.). The lubricant division saw sales volume fall QoQ, but operating profit expanded by 21% QoQ to KRW255.2bn on the back of ASP hikes and a 3% QoQ rise in spreads.

The battery division’s sales value went up slightly by 2% QoQ on ASP gains, even with a decrease in sales volume. However, its operating loss widened QoQ to KRW326.6bn due to increases in power costs and fixed costs at the Hungarian plant.

3Q22 OP forecast at KRW987.7bn (-58% QoQ); battery loss to narrow

For 3Q22, we forecast operating profit at KRW987.7bn (-58% QoQ). Refining operating profit should come to KRW776.2bn (-65% QoQ) on declines in inventory valuation gains and refining margins. A drop in refining margins looks inevitable despite tight supply, with demand weighed down by the global economic slowdown. Petrochemical operating profit is projected to fall 16% QoQ because of the weak olefin spread, even with solid spreads of aromatics. The lubricant division is forecast to record operating profit growth of 3% QoQ. Price spreads are maintained at high levels with lube base oil prices rising while costs are falling.

Battery sales are expected to jump 61% QoQ as cost hikes are passed onto prices and shipments are growing. Operating loss should decrease to KRW188.5bn (+KRW138.1bn QoQ), backed by the gradual ramp-up of new plants (first US plant, etc.) and easing the burden of fixed costs.

Retain BUY for a target price of KRW270,000

We retain our BUY rating on SK Innovation for a target price of KRW270,000. Despite robust refining earnings, the shares have been on a downtrend since June due to concerns over the battery business. Uncertainties still linger over battery operations, but expectations should start to rise in 2H22 as losses narrow with: 1) ASP increase; 2) shipment growth; and 3) new plants up and running.

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