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[SKC] Earnings remain stable; growth momentum to strengthen

June 23, 2015 17:33lJune 23, 2015 22:39
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Earnings remain stable; growth momentum to strengthen
SKC’s share price has been correcting as of late on concerns towards the firm’s earnings and growth potential. However, we believe that SKC’s 2Q15 operating profit has remained stable q-q thanks to likely better-than-expected earnings at the chemical and film divisions. Moreover, expectations towards SKC’s growth potential should gain traction going forward on: 1) the company’s planned establishment of a JV in July; and 2) the likely expansion (via subsidiaries) of the firm’s semiconductor material and cosmetics material businesses.


2Q15 preview: Despite recent share price correction, earnings to stabilize q-q
-Over the last month, SKC’s share price has slipped 11.5% (down 3.5%p), weighed upon by market worries towards its 2Q15 earnings due to: 1) the expected recognition of restructuring costs (SK Telesys); and 2) likely margin deterioration at the film division amid weak display industry conditions.
-However, we view the share price correction as offering an opportunity to load up on a growth stock, believing that: 1) SKC’s 2Q15 operating profit will come in at W59.0bn, a level similar to that in 1Q15; 2) margins at the film division will enhance q-q, buoyed by both the effects of PET film industry restructuring and higher sales of high-functionality film products; and 3) anticipation towards the firm’s growth potential will gain greater traction following its planned (in July) establishment of a JV and the expected expansion of its semiconductor and cosmetics materials domains

2Q15 preview: Earnings to be solid; growth momentum to strengthen after establishment of JV in 2H15

-We project 2Q15 sales of W736.9bn (down 1.0% y-y) and operating profit of W59.0bn (up 33% y-y). We believe that operating profit at the chemical division will improve y-y on: 1) product line diversification; and 2) lower input costs (propylene). Despite the recognition of restructuring costs at SKC Telesys, SKC’s subsidiaries should display operating profit improvement (y-y) led by: 1) SKC’s recent acquisition of Bioland; and 2) likely higher sales at SKC Solmics and SKC Airgas. However, we expect operating profit at the film division to slip y-y amid weak display industry conditions. By business arm, we believe that SKC’s overall 2Q15 operating profit figure will break down as: 1) chemical division (W41.2bn); 2) film division (W10.2bn); and 3) subsidiaries (W7.6bn).

-Going forward, SKC’s financial structure should enhance in response to: 1) gains on expected disposals of some of its polyol and S/H-related assets (W370bn); and 2) a likely decrease (of around W190bn) in its liabilities. Over the long term, we believe that the deal with Mitsui Chem will lead to: 1) expansion of SKC’s polyurethane (PU) manufacturing lines (complete vertical integration); 2) the strengthening of SKC’s overseas sales numbers; and 3) greater capacities of scale (to reach global top-tier level). Believing that it will benefit from network expansion and capacity additions, we forecast that sales at the JV will climb from W1.3tn in 2016 in W2.0tn by 2020.

*Source:NH Investment & Securities Co.