Maintain BUY and revise up our target price to KRW400,000
We maintain BUY and revise up our TP by 6.7% to KRW400,000 for SK innovation to reflect increases in EV for Battery (from KRW10.9tn to KRW13.6tn) and Refining (from KRW12.0tn to KRW13.1tn)—the former driven by greater battery order backlog and the latter by higher refining margins. Key takeaways from the 1Q21 results include the following: (1) battery order backlog rose from 550GW (KRW72tn) to 600GW (KRW80tn); and (2) Refining earnings are likely to improve, aided by higher margins. We expect more positive news to come.
1Q21 earnings beat market consensus
SK innovation posted 1Q21 revenue of KRW9.24tn (-17.2% YoY, +25.2% QoQ) with OP entering positive territory YoY and QoQ at KRW502.5bn and exceeding market consensus (KRW361.8bn, FnGuide, Apr 14). Refining saw revenue drop 26.9% YoY to KRW5.88tn but OP entered positive territory YoY at KRW416.1bn (OPM 7.1%) thanks to increased inventory gains as a result of hikes in global oil prices as well as refining margin improvements. Meanwhile, Petrochemical OP swung into the black YoY at KRW118.3bn on wider spreads for PX and benzene. Battery saw revenue reach KRW526.3bn (+82.2% YoY, +5.9% QoQ), but operating loss continued YoY at -KRW176.7bn. Revenue received an uplift from the start of battery supply for Ioniq 5, but profitability suffered due to initial costs related to the new factory.
Resolution of uncertainty to lead to higher visibility for Battery growth
SK innovation has seen a slew of negative issues in 1H21, such as the announcement by Volkswagen of its plans to transition from pouch batteries to prismatic batteries and CBU makers’ plans to produce batteries in-house. However, CBU makers are unlikely to be able to internally source all the batteries they need, and we see pouch batteries as having their own merits. 2H21 should see more positive news, in our view. All uncertainty surrounding the company’s battery business has been resolved, thanks to the final settlement reached with LG Energy Solution. The rise in battery order backlog seen in 1Q21 should continue as SK innovation wins more orders down the road, giving way to a boost in Battery EV.