SK's battery unit split-off drives polarized responses

The share price of South Korea's SK Innovation Co. has extended losses following its confirmation on Tuesday of the battery business splif-off plan, which drove polarized responses from analysts.

After the battery-to-petrochemical company on July 1 annuonced a possible hive-off of the battery unit and the latter's initial public offering, five domestic brokerage houses have cut their target prices on SK Innovation on concerns about its diluted ownership in the battery operations. 

Two of the brokerage companies -- Hana Financial Investment Co. and eBest Investment & Securities Co. -- downgraded the stock to hold and slashed their target prices by 13-31%. Between July 1 and Aug. 5, the share price of SK Innovation has tumbled almost 20%, versus the steady wider market during the same period. 

A total of 19 domestic brokerage firms have issued research notes in response to the company's July 1 announcement. Among them, Mirae Asset Securities Co. is the only research house that has raised its target price on SK Innovation and its recommendation to buy, stressing the growth potential for the battery business.

At the center of the controversy is whether the current share price of SK Innovation has reflected appropriately the future value of the battery business, set to be separated in October. After the split-off, the remaining entity SK Innovation will serve as a holding company of the battery unit that is expected to turn profitable next year.

"Its battery business is doing so well that it would be premature to worry about the diluted shareholding, which will likely happen one year later," said HI Investment & Securities analyst Chun Yujin. "The current share price has not reflected the proper value of the battery business division at all."  

Other analysts compared SK Innovation to its bigger rival LG Chem Ltd. whose share price has surged over 30% since the announcement in September 2020 of its battery business split-off.

They argued the discounted value of SK's battery unit, estimated between10 trillion and 20 trillion won, is too low compared with the projected 100 trillion won for the battery-focused LG Energy Solution Ltd. which is preparing an IPO. 

But Hyundai Motor Securities analyst Kang Dong-jin took the opposite view, saying that the battery business value is well reflected in the share price of SK Innovation.

On Friday afternoon, SK Innovation edged up 0.63% at 240,000 won, reversing its three-day losing streak.

Regardless of their optimism for SK's battery unit which has 130 trillion won ($114 billion) worth of order backlogs, they differ on which year should be used as the base year to assess SK's battery business value, as well as their discount rate to apply to SK Innovation's valuation.

Still, 13 domestic brokerage houses have stuck to their target prices and opinions on the stock, which some market participants doubted might be related to their companies' efforts to win IPO mandates from the battery unit.

Of the target prices suggested by 19 research houses, the highest forecast is 400,000 won from Daishin Securities Co., Shinyoung Securities Co. and HI Investment & Securities Co. The lowest target price is 250,000 won recommended by both Hyundai Motor Securities Co. and DB Financial Investment Co., compared with the current price of 240,000 won.

By Yun-sang Ko

kys@hankyung.com

Yeonhee Kim edited this article.