A Marked Turnaround
The author is an analyst of KB Securities. He can be reached at yc.baek@kbfg.com. -- Ed.
Maintain BUY and revise up target price to KRW125,000
We maintain BUY and raise our TP by 13.6% to KRW125,000. Our new TP is based on upward revisions to 2021E/2022E NP (attributable to controlling interests) of 19.7%/ 13.4% that reflect earnings improvements for Petrochemical and Lube Base Oil (LBO). Derived using the P/B-ROE model, our TP corresponds to 2021E P/E and P/B of 15.0x and 2.24x, respectively.
1Q21 earnings beat market consensus
S-Oil reported 1Q21 revenue of KRW5.34tn (+2.8% YoY/+24.9% QoQ), with OP entering positive territory YoY at KRW629.2bn (+670.1% QoQ), much higher than the market consensus of KRW378.6bn (FnGuide, Apr 14). The OP improvement was supported by inventory-related gains and growing profits at Petrochemical and LBO. Refining OP entered positive territory QoQ/YoY at KRW342.0bn (9.0% OPM). Excluding inventory-related gains of around KRW250.0bn and positive FX impact of KRW40.0bn, Refining OP would be above KRW50.0bn. For Petrochemical, OP surged 47.8% YoY to KRW98.3bn (9.6% OPM), supported by better PP/PO spreads and greater sales volume. For LBO, OP also surged, reaching KRW188.9bn (+62.6% YoY) thanks to continually bullish LBO prices.
Strengthening fundamentals at Petrochemical and Lube Base Oil
1Q21 earnings results demonstrate Petrochemical and LBO’s solid profit-generating capabilities. For the year, the two segments should contribute combined OP of KRW1.0tn, which would be a marked turnaround from the company-wide operating loss of over KRW1.0tn in 2020. S-Oil secured PP/PO production capacity of 405,000 tonnes/300,000 tonnes in 2019 upon completion of the RUC/ODC project. Profitability has been surging via yield improvements and greater utilization rates since 2H20. The PP/PO facilities alone should contribute around KRW400.0bn in OP annually. Meanwhile, Lube Base Oil earnings improvement driven by LBO price markups should continue in 2021 and well into 2022. In addition, the start of EV-purpose LBO sales should add further momentum to profitability.