[Into the Stock] SK Ino's 'Deep Change' Stock Price Also 'Deep Change?'

[Asia Economy Reporter Junho Hwang] Since SK Innovation announced the spin-off of its battery business in October, its stock price has been declining. Investor sentiment is gradually cooling amid changes at SK Innovation, including the spin-off of one of its core businesses, the battery division. While some analysts in the securities industry point out that investment opportunities are disappearing one by one due to factors such as holding company discounts, others argue that the holding company discount issue will arise only after a year and that focus should be placed on current value, such as the reduction of losses in the battery business.

According to the Korea Exchange on the 5th, as of 11:49 a.m., SK Innovation was trading at 236,500 KRW per share, down 2.87% from the previous closing price. The stock has fallen 4.92% over the past two trading days, and the downward trend shows no signs of stopping.

Short sellers have also joined the stock price decline. On the 4th, SK Innovation's short-selling trading value increased the most on the KOSPI. It surged from 4.5 billion KRW on the 3rd to 47 billion KRW on the 4th. SK Innovation, which did not even rank among the top 50 short-selling stocks on the 3rd, jumped to 18th place on the 4th.

Investment Points Are Disappearing One by One

Despite the stock price decline, the view that further downside is likely stems from the perspective that investment points are disappearing one by one.

In addition to the battery business spin-off, SK Innovation has been selling its Peruvian mining rights and SK Lubricants shares. There are also rumors about selling 49% of SK Global Chemical’s shares, and during the recent earnings conference call, the possibility of selling shares in the refining business was mentioned. Following all these processes, the surviving entity announced a growth strategy to promote the Battery Material Recycling (BMR) business, which recovers lithium hydroxide, a key battery material, from used batteries. SK Innovation’s EBITDA target for this business in 2025 is 300 billion KRW. However, doubts are emerging about whether the company can enter a virtuous cycle that offsets profit declines from selling existing business shares and sustains itself independently.

Jaesung Yoo, a researcher at Hana Financial Investment, said, "During the deep change of the portfolio (SK Chairman Chey Tae-won's management focus), investment points for SK Innovation are being deleted one by one. There are many alternative individual investments within the same industry that hold similar portfolios. Until a core strategy to overcome the decline in relative attractiveness is presented, a conservative investment perspective is recommended."

Anna Lee, a researcher at eBest Investment & Securities, also analyzed, "The battery spin-off is likely to lead to a quick initial public offering (IPO), and it is difficult to say that the businesses excluding the battery division are undervalued because most of the non-growth businesses are likely to be sold." Accordingly, she explained, "Considering that the core business will be split and listed, and the corporate value of each division will gradually shrink due to sales, the current stock price is not undervalued."

Hana Financial Investment adjusted its investment opinion from buy to neutral and lowered the target price from 310,000 KRW to 270,000 KRW. eBest Securities also changed its investment opinion to neutral and cut the target price from 377,000 KRW to 262,000 KRW.

There Is Still Time Until the IPO

[Image source=Yonhap News]

On the other hand, although the spin-off has increased the possibility of an IPO for the battery business, it is judged that it is too early to worry about share dilution and supply-demand noise, as this will likely occur at the earliest one year later.

Yujin Jeon, a researcher at Hi Investment & Securities, said, "Since an additional investment of 18 trillion KRW is needed for the battery business over the next five years, the company appears to be undertaking a physical spin-off to raise capital in earnest." He added, "From the perspective of the company and shareholders, the IPO is most rational when profits are generated and appropriate value can be received. Since a large deficit is expected this year and a profit of around 300 billion KRW is anticipated only in 2023, the IPO timing is likely to be in the second half of next year at the earliest."

He continued, "It is too early to worry about share dilution and supply-demand noise that will occur at least a year later, as the immediate battery performance improvement and order situation are very encouraging," and "especially, the current stock price does not reflect any value of the battery division, so there is no valuation burden."

Youngchan Baek, a researcher at KB Securities, also stated, "Proactive battery capacity expansion investment over the next 2-3 years will determine the battery company’s value by securing the market in advance," and added, "Considering long-term corporate value enhancement, this physical spin-off is definitely positive."

Hi Investment & Securities maintained its buy rating and target price of 400,000 KRW. Additionally, Samsung Securities, Hanwha Investment & Securities, and BNK Investment & Securities have not changed their buy ratings or target prices.