Shipping Companies and Shipbuilders Testing Bio-heavy Oil

The author is an analyst of NH Investment & Securities. He can be reached at hyundong.lee@nhqv.com. -- Ed.

 

JC Chemical logged its highest-ever quarterly earnings in 1Q21. Sales at its bio-heavy oil division surged on a tightening of the renewable portfolio standard (RPS). Both a rising palm oil price and a higher mandatory blending ratio of biodiesel are to steer the firm’s earnings growth in 2Q21.

Sales surge 92% y-y at bio-heavy oil division amid stricter environmental regulations

JC Chemical logged its highest-ever quarterly earnings in 1Q21, showing sales of W79.8bn (+30% y-y), OP of W8.7 (+95% y-y), and OPM of 10.9%. We attribute the expansion in OPM to: 1) higher ASPs; 2) the covering of fixed costs by strengthened sales; and 3) W1bn y-y worth of SG&A expense savings stemming from the use of its own storage and shipping facilities that were completed last year. Armed with these positives, the firm is well situated to see OPM improvement (y-y) in 2Q21 as well.

The bio-heavy oil division led the company-wide earnings growth, enjoying sales of W40.4bn (+92% y-y). The mandatory renewable energy quota tightened from 7% to 9% this year, and will be increased to 25% by 2030. As bio-heavy oil is an eco-friendly fuel that can run generators without the need for desulfurization and denitrification facilities, the company is to benefit from the eco-friendly changes in government policy. In addition, if shipping companies and shipbuilders adopt JC Chemical’s bio-heavy oil (which is currently under testing), further growth is to be seen.

Higher mandatory blending ratio and rising palm oil price to drive earnings growth

The biodiesel division’s 1Q21 sales were held to W30.2bn (-4% y-y). However, the tightening of the mandatory blending ratio from 3% to 3.5% (starting from 2H21) should result in biodiesel market growth of 17% y-y. Given such, we see 2021E sales of W135.4bn (+13% y-y) for the firm’s biodiesel division.

The company’s subsidiary-oil palm plantation in Indonesia should show strong earnings growth as well. Currently, palm oil prices are at record high of US$1,168/MT. We expect the benefits of both the high palm oil price and capacity expansion to be reflected in earnings from 2Q21. Accordingly, the subsidiary is likely to display 2Q21 OP of W4bn (+135% y-y).

JC Chemical’s shares are currently trading at 2021E P/E of 8.8, their lowest valuation in the past five years. Given the domestic renewable energy peer average P/E of 22.0x, we view the firm’s shares as being heavily undervalued.
 

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