SK On eyes return to profit through mergers with 'cash cows' SKTI, SK Enterm

SK On expects that a merger with SK Trading International this year and SK Enterm next year will stabilize its books as it absorbs the "cash cows."

SK On's battery plant in Seosan, South Chungcheong [SK ON]

SK On is expecting mergers with other SK affiliates to help it turn to profit and secure stable revenue streams to keep up with its investments in EV battery facilities amid slowing demand.

SK On and SK Trading International (SKTI), a crude oil trading subsidiary previously owned by SK Innovation, will merge on Nov. 1. The deadline for SK On and SK Enterm, an energy logistics subsidiary, is set for Feb. 1 next year.

The merger will improve SK On's annual earnings before interest, taxes, depreciation and amortization (ebitda) by 500 billion won ($360 million), according to SK Innovation CEO Park Sang-kyu at a press conference on Thursday held to explain his company's merger with SK E&S, which will result in the largest private energy company in the Asia-Pacific region with an asset value of 100 trillion won.

"SK On will enhance the sustainability of its battery business and firmly establish itself in the future global electric vehicle market by generating an annual ebitda of 500 billion won from its trading and tank terminal businesses," Park said.

SK Innovation owns an 89.52 percent stake in SK On, while SKTI and SK Enterm are fully-owned by the energy giant.

SKTI and SK Enterm are considered to be “cash cows” that are profitable without large capital expenditures. SKTI posted annual revenue of 49 trillion won last year and an operating profit of 574.6 billion won.

SK Enterm was a newly formed subsidiary under SK Innovation, which spun off from the tank terminal business division of SK Energy back in January to handle energy logistics and storage.

SK On has bled losses, but reduced the deficit to 18.6 billion won in the fourth quarter of 2023. However, the operating loss again widened to 331.5 billion won in the first quarter of 2024 due to a global EV sales slowdown.

SK On aims to turn to profit in the second half of this year, based on its market projection of a rebound in the prices of key raw materials driving battery price hikes along with increased demand for battery inventory.

"The merger between SK On, SKTI and SK Enterm is expected to result in an additional cash flow between 600 billion and 700 billion won for SK On,” said Mirae Asset Securities analyst Lee Jin-ho in a report.

The move is also considered to be part of SK On’s goal of an initial public offering, and stable profitability is considered a crucial prerequisite.

“Through the merger of the three companies, we will create synergies to secure competitiveness in raw material supply and establish a stable financial structure through trading and storage businesses,” SK On CEO Lee Seok-hee said at an internal meeting on Wednesday.

BY LEE JAE-LIM [lee.jaelim@joongang.co.kr]