Merger boosts SK On’s bid for turnaround

SK On's announcement Wednesday that it will merge with SK Trading International and SK Enterm has raised hopes of a potential turnaround in its financial performance and competitiveness in the battery industry.

SK On has been grappling with persistent financial losses. The company, spun off from SK Innovation in October 2021, reported an operating loss of 581.8 billion won ($419.5 million) last year and 315 billion won in the first quarter of this year. This marked its 10th consecutive quarterly loss, with cumulative losses surpassing 2.5 trillion won.

The newly formed entity, to officially launch on Feb. 1 next year, reported combined sales of approximately 62 trillion won last year. SK Trading International and SK Enterm are financially robust, generating significant cash flow with minimal capital expenditure.

SK Trading International, a crude oil and petroleum product trading company that was spun off from SK Energy in 2013, enjoys stable revenue through its dealings with SK Energy, SK Geocentric and SK Incheon Petrochem. It has posted a combined operating income of around 2 trillion won over the past five years.

SK Enterm, South Korea's largest commercial tank terminal operator, recorded 64.4 billion won in sales in the first quarter of this year, supported by reliable income from SK Energy and other affiliates.

The merger is expected to make SK On profitable by next year. Last year, SK Trading International recorded an operating profit of 574.6 billion won, while SK Enterm has shown steady profits since its inception in January. SK On forecasts gradual operational improvements starting from the second half of this year, driven by a recovering market, new car launches and rising battery demand.

Additionally, the merger is projected to boost SK On’s annual earnings before interest, tax, depreciation and amortization, or EBITDA, by approximately 500 billion won annually. Last year, SK Trading International reported an EBITDA of about 580 billion won, while SK On’s EBITDA was minus 30 billion won due to depreciation expenses of new global factories.

Given the current high-interest-rate environment, analysts expect SK On will rely less on external borrowing thanks to a stabilized cash flow from the merger. This financial stability will give SK On the flexibility to build its profit structure and better withstand short-term market fluctuations, such as a potential slowdown in electric vehicle sales.

Crucially, the merger is expected to strengthen SK On's core battery business, which is essential for its future growth. Improved financial conditions will support the company’s global factory expansion and accelerate diversification in battery technology, including prismatic, cylindrical, lithium iron phosphate and midnickel formats.

In the medium to long term, SK On is expected to benefit from enhanced battery raw material trading that will aid in reducing purchasing costs, stabilizing the supply chain and improving profitability.

Industry analysts have reacted positively to the merger announcement.

“SK On's capital expenditure burden will significantly ease this year. With 700 billion won in depreciation and SK Trading's annual EBITDA of 600 billion won, their financial load will be much lighter as they move toward profitability,” said Kang Dong-jin, an analyst at Hyundai Motor Securities.

“By merging, SK On can capitalize on synergies in battery raw material trading, which should expedite their return to a solid performance. We’re quite positive about their chances of turning things around sooner than expected,” said battery sector analyst Chun Woo-je from KB Securities.