Merger And Expansion Will Drive Global Electrification Trends

Key Takeaways

• The merger and expanded focus on battery and energy solutions strengthen SK Innovation's growth prospects through technological differentiation and global electrification trends.
  
• Strategic U.S. and European investments, alongside asset optimization, enhance revenue growth, reduce financial risk, and position the company for higher profitability.
  
• Mounting policy challenges, financial strain, and volatile legacy businesses threaten SK Innovation's profitability, while ambitious battery expansion faces execution risks and uncertain long-term growth.

Catalysts

Engages in the production and sale of petroleum products, lubricants, and base oil in South Korea and internationally.

• The merger of SK On (EV/ESS batteries) and SK Enmove (EV fluids, lubricants, immersion cooling) is expected to create significant business and financial synergies, positioning SK Innovation as a key beneficiary of the global push toward electrification, with EBITDA anticipated to rise by ₩200 billion by 2030-supporting sustained revenue and margin growth.
  
• Aggressive expansion in U.S. and European battery plants and increased utilization rates have already driven a 31% quarter-on-quarter sales increase in the battery division, directly linked to rising demand from global automakers amid the accelerating EV adoption trend-setting up a multi-year growth trajectory for segment revenues.
  
• Rapidly growing demand for energy storage solutions and backup power (ESS) driven by digitization and data center expansion has led SK On to target the U.S. ESS market with next-generation LFP technology and gigawatt-level supply contracts in negotiation, expanding the company's addressable market and underpinning future revenue streams.
  
• Comprehensive asset optimization and a ₩5 trillion capital raise are on track to reduce net debt by over ₩9.5 trillion in 2025, significantly strengthening the balance sheet and reducing financial risk-allowing more capital to be allocated toward growth initiatives and potentially improving net earnings.
  
• The integrated development of advanced thermal management and battery safety solutions (via the merger) enables technological differentiation, supporting higher-margin, value-added product offerings and providing a long-term tailwind to gross margin and overall profitability as regulatory and safety requirements for EVs and ESS sharpen globally.

SK Innovation Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SK Innovation's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.1% today to 1.7% in 3 years time.
• Analysts expect earnings to reach ₩1529.1 billion (and earnings per share of ₩8163.6) by about August 2028, up from ₩-2388.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩2398.0 billion in earnings, and the most bearish expecting ₩-1423.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.3x on those 2028 earnings, up from -6.8x today. This future PE is greater than the current PE for the KR Oil and Gas industry at 11.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.93%, as per the Simply Wall St company report.

SK Innovation Future Earnings Per Share Growth

Risks

• Rising policy headwinds in the U.S. (including removal of consumer EV tax credits and imposition of reciprocal tariffs) are increasing demand uncertainty and cost pressures for SK Innovation's battery division, especially at a time when new U.S. battery plant ramp-ups may elevate initial fixed costs-potentially reducing near-term and mid-term revenue and net margins.
  
• Aggressive capital raising, including ₩5 trillion in new capital and significant perpetual bond issuance, is increasing interest and financing expenses; coupled with elevated net debt, this raises the risk that debt servicing costs will eat into future net earnings and limit capital available for growth.
  
• Continued significant operating and non-operating losses (with Q2 2025 showing operating and net losses from both refining and battery segments), alongside large asset impairments and ongoing exposure to inventory valuation swings, create inconsistent profitability and may signal persistent underperformance, pressuring shareholder returns and valuation.
  
• Secular decline in demand for petroleum products and petrochemical business weakness-as highlighted by continued operating losses in refining and petrochemicals due to overcapacity, market uncertainty, and pricing volatility-threatens the stability of legacy revenue streams and makes the transition to new growth engines more urgent but also more uncertain.
  
• Execution risks in scaling battery operations globally (delayed order finalizations, production inefficiencies, customer demand volatility, and ongoing negotiations for tariff cost pass-through), combined with heavy capex for expansion, could compress gross margins and jeopardize the anticipated growth in consolidated EBITDA, impacting both profitability and long-term earnings stability.

Valuation

• The analysts have a consensus price target of ₩121608.696 for SK Innovation based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩180000.0, and the most bearish reporting a price target of just ₩55000.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩87407.0 billion, earnings will come to ₩1529.1 billion, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 11.9%.
  
• Given the current share price of ₩109000.0, the analyst price target of ₩121608.7 is 10.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.