SK Innovation Co Ltd (096770:KS) shares soared yesterday following reports of a possible merger with SK E&S, a non-public entity within the same group. While SK Innovation has not confirmed any specific plans, the company has acknowledged it is exploring a range of strategic options.
Citi has reiterated its Neutral stance on SK Innovation, maintaining a price target of KRW120,000.00. The firm acknowledges the potential benefits of merging with SK E&S, particularly in terms of the latter's consistent revenue streams from its city gas distribution, LNG value chain, and independent power production (IPP) operations. Such a merger could provide some relief to SK Innovation's concerns over funding its battery capital expenditures.
However, the investment firm points out that the main issue for SK Innovation's minority shareholders is the risk of share dilution. The uncertainty lies in determining an appropriate share swap ratio between the two entities. SK E&S's EBITDA for the years 2022 and 2023 was approximately W2 trillion per annum.
Citi's analysts estimate that the combined net debt-to-equity ratio of the entity post-merger could improve to around 73%, compared to SK Innovation's standalone 81% and SK E&S's 47%. Additionally, the net debt to EBITDA ratio could decrease to about 4.2 times from SK Innovation's current 5.6 times.
Citi's position remains cautious, pending further details on the merger. The firm notes that a significant valuation gap between SK E&S and SK Innovation could continue to weigh on the latter's stock. The potential merger is still under review, and no definitive decisions have been made at this stage.
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