[Click eStock] "SK Innovation, Caution on Simultaneous Weakness in Refining and Battery in Q2-Q3... Target Price Down"

Target Price Downgraded from 240,000 Won to 200,000 Won

Yuanta Securities on the 4th downgraded the target price for SK Innovation from 240,000 KRW to 200,000 KRW, cautioning about simultaneous weakness in refining and battery sectors in the 2nd to 3rd quarters of this year. The investment rating was maintained as 'Buy.'

Hwang Kyu-won, a researcher at Yuanta Securities, explained, "Considering the weak performance in the 2nd to 3rd quarters and additional financial burdens, we are lowering the fair price for this year," adding, "Because external financing of about 6 trillion KRW is again required, given total capital expenditures (CAPEX) of 9.5 trillion KRW including 7.5 trillion KRW for batteries, compared to an EBITDA of 3.5 trillion KRW after tax."

The 2nd quarter performance is expected to be sluggish. Yuanta Securities estimates SK Innovation's 2nd quarter sales at 1.8 trillion KRW and operating profit at 376 billion KRW. Researcher Hwang analyzed, "Operating profit is expected to decrease by 40% compared to 624.7 billion KRW in the previous quarter," adding, "Due to the sharp drop in refining margins, the refining sector will see a significant decline in profits, while the battery sector will reduce its deficit but still continue to post losses in the 200 billion KRW range."

Attention should be paid to simultaneous weakness in refining and battery sectors in the 2nd to 3rd quarters. Researcher Hwang stated, "With the concentrated operation of large facilities in Kuwait, Nigeria, and Mexico increasing supply pressure, the Singapore refining margin, a profitability indicator for the refining sector, will fall below the break-even point of 4 to 4.5 USD per barrel," and explained, "Battery utilization rates will remain around 70%, leading to continued losses." He added, "A yield of 90% and utilization rate of 90% are needed to break even, but in the first half of 2024, plant utilization rates are expected to remain at 85% in China, 70% in Europe, and 10-20% in the U.S., and with the completion of capacity expansions of 30GW in Hungary in Q2 and 33GW in China in Q3, recovery of utilization rates will be slow."

However, the performance is analyzed to be bottoming out. Researcher Hwang said, "Annual operating profit is bottoming out from 1.9 trillion KRW in 2023 to 2 trillion KRW in 2024 and 2.8 trillion KRW in 2025 (assuming a battery profit of 105.7 billion KRW), and with a price-to-book ratio (PBR) of 0.42 times at the bottom, the current stock price level is not considered high."