Stocks of SK Group’s intermediate holding firms up on rosy subsidiary outlook

SK Group headquarters [Photo by Han Joo-hyung]

The stocks of intermediate holding companies of SK Group, South Korea’s second-largest conglomerate, are on a rise after remaining stagnant last year on growing expectations that their bottom line from their subsidiaries will improve.

According to Korea Exchange on Wednesday, shares of SK innovation Co. soared 21.75 percent this year and those of SK square Co. and SKC Co. 21.46 percent and 23.05 percent, respectively. The rise has been mainly led by individuals and institutions.

Individual investors net bought 337.4 billion won ($254.1 million) in SK innovation shares and 126.9 billion won in SKC shares this year. Institutional investors also net purchased 91.9 billion won in SK square shares.

The buying spree comes as expectations grow that earnings of these SK Group’s core intermediate holding companies will rebound after bottoming out in the first quarter, according to market insiders.

In general, the net profit of controlling shareholders is considered the profit indicator for holding companies instead of the operating profit as net profit of subsidiaries reflected in their own profit in proportion to their stake acts as a more practical indicator of profit.

According to market data tracker FnGuide, the brokerage consensus for the first-quarter net profit of controlling shareholders for SK Group’s intermediate holding companies has been revised down.

SK innovation Co. logo [Courtesy of SK innovation]

SK innovation’s first-quarter net profit estimate for controlling shareholders was 467.2 billion won three months ago but it was significantly reduced to 48.5 billion won in mid-April. SK square had been projected to record a profit of 247.7 billion won three months ago but is currently expected to suffer losses worth 357.8 billion won. SKC was also projected to lose 9.4 billion won.

However, the three companies are expected to see improved profit from the second quarter.

According to Shinhan Investment & Securities Co., SK innovation and SKC’s net profit for controlling shareholders in the first quarter is projected at 45.1 billion won and a loss of 9.4 billion won, respectively, but are expected to rise to 123 billion won and 7.8 billion won each in the second quarter.

Annual earnings of SK innovation are expected to surge to 1.52 trillion won next year from 964.5 billion won this year, while SK square is projected to swing to a profit of 537.7 billion won next year from a loss of 980.4 billion won this year. SKC’s net profit is also projected to triple during the period.

SK innovation, considered a secondary battery stock for its subsidiary SK on Co., is gaining attention. The market expects SK on’s operating loss in the first quarter to widen further from the previous quarter due to a fall in battery shipments and rising costs. However, the company’s operating profit is estimated to increase 30 percent if tax incentives worth 6 trillion won from the Advanced Manufacturing Production Credit (AMPC) under the U.S. Inflation Reduction Act are reflected in the next three years.

SK innovation plans to acquire treasury shares equivalent to 10 percent of its market cap through a tender offer when SK on pursues an initial public offering (IPO). It plans to use SK on shares instead of cash for payment during the tender offer period.

SK square Co. logo [Courtesy of SK square]

Shares of SK square, in the meantime, depend on the earnings of its flagship subsidiary SK hynix Inc. SK hynix is projected to post a loss of 10 trillion won this year but is expected to swing to a profit of 4.2 trillion won next year. Prices of memory chips such as dynamic random-access memory (DRAM) and NAND flash are expected to bottom out this year.

The company will also be able to benefit from enhanced corporate value if its key subsidiaries such as SK shieldus Co. and One Store Co. go public once the stock market environment improves. SK square said that it will spend more than 30 percent of its ordinary dividend income over the next three years for share buyback, treasury share retirement, and dividends. The shareholder return for this year is estimated at 310 billion won. SK hynix announced a quarterly dividend of 300 won per share in a regulatory filing on Wednesday.

SKC’s core copper foil business is expected to remain sluggish until the first half of this year, but the company’s profitability is likely to improve in the second half as a result of customer diversification and factory expansion. SK nexilis Co., a grandson company of SKC, signed a copper foil supply contract worth up to 1.4 trillion won with Swedish battery manufacturer Northvolt AB in February.

“Copper foil sales are also expected to ratchet up in the second and third quarters given the pace of rising demand from vendors,” said Kim Hyun-tae, an analyst at BNK Securities Co.