'Earnings Surprise' SK Inno Lowers Target Price... SK On Holds Back

[Asia Economy Reporter Junho Hwang] SK Innovation recorded an earnings surprise, but securities firms have lowered their target stock prices. Although the refining market conditions drove strong performance, it is judged that a stock price rebound will be difficult until SK On's turnaround to profitability becomes visible and funding risks are resolved.

SK Innovation announced on the 29th that its consolidated operating profit for the first quarter of this year reached 1.65 trillion KRW, a 228% increase compared to the previous year. This figure far exceeded market expectations of 1.06 trillion KRW.

Operating profit from the petroleum business improved significantly to 1.5 trillion KRW. Included in this was approximately 600 billion KRW in inventory-related gains, while E&P and lubricants operating profits were solid at 200 billion KRW and 210 billion KRW, respectively.

On the other hand, SK On continued to post an operating loss. SK On recorded an operating loss of 273.4 billion KRW,

due to increased costs from the startup of new plants in the United States and Hungary.

Researcher Jaesung Yoon of Hana Financial Investment analyzed, "SK On's operating losses are expected to continue into the second quarter of this year." Hana Financial Investment forecasts operating profit of about 1.1 trillion KRW for the second quarter of this year, estimating petroleum business operating profit at around 1 trillion KRW. Considering that the actual operating profit excluding first-quarter inventory-related gains was 900 billion KRW, it is expected that profit increased by about 100 billion KRW over one quarter.

This can be seen as a very conservative estimate. Even considering the sharp rise in OSP (Official Selling Price of Middle East crude oil, a premium added to international oil prices), improved refining margins and inventory-related gains based on the weighted average cost method should be reflected as potentially increasing significantly. However, since SK On's expected operating loss for the second quarter is about 297.8 billion KRW, it is difficult to incorporate such optimistic views into the forecast.

Researcher Jinho Lee of Mirae Asset Securities adjusted the target stock price down by 17.6% to 280,000 KRW and stated, "It is time to approach SK On's business value from a more mid- to long-term perspective," adding, "We considered the downward revision of SK On's valuation and the increased discount rates for subsidiaries."

Researcher Yoon explained, "Although the operating profit estimate for this year was raised by 32%, the possibility of SK On's turnaround to profitability being delayed from the fourth quarter of this year to next year has been raised, so the target stock price is maintained at 270,000 KRW," adding, "Considering the conservatively estimated second-quarter performance, there is still room for stock price appreciation, so we maintain a 'buy' rating."

He further stated, "The stock price will clearly respond when SK On's profitability turnaround becomes visible and funding risks are resolved," adding, "It is somewhat regrettable that SK On's spin-off, which is the fundamental reason making it difficult to enjoy the refining business's strong performance, has occurred."

This content was produced with the assistance of AI translation services.