Structural Improvements in Refining Margins
The author is an analyst of KB Securities. He can be reached at yc.baek@kbfg.com. -- Ed.
Raise target price to KRW143,000
We maintain BUY on S-Oil and raise our TP to KRW143,000 to accommodate upward revisions to earnings estimates; 2021E/2022E NP (attributable to controlling interests) were bumped up 12.7%/11.2%. Our new TP implies 15.2x 2021E P/E, 2.52x P/B.
2H21 investment points: (1) Structural improvement of refining margin; (2) Petrochemical earnings to be boosted by RUC/ODC facility improvements
We favor S-Oil as our top pick of 2H21 because we expect earnings to increase on structural improvements in refining margins and better facility efficiency. The complex margin (spot basis) has been sliding since a peak of USD6.10/bbl in 2017 because of a dip in demand for petrochemical products and an expansion of refineries in China. However, the situation is different now; global refining capacity is forecast to increase by 420k b/d in 2021 and 570k b/d in 2022 but likely to remain short of demand growth given refinery shutdowns triggered by the pandemic and conservative capacity increases amid concerns over long-term profitability. Advances in green energy are undermining petrochemical product supplies, which, ironically, is pushing up refining margins. S-Oil’s Petrochemical margins are seeing structural improvement thanks to advances in RUC/ODC facilities. Petrochemical and Lube Base Oil performance should allow OP to surpass KRW1.0tn.
2Q21 preview: Earnings to beat market consensus
We forecast 2Q21 revenue at KRW5.73tn (+66.1% YoY, +7.3% YoY) and OP at KRW418.3bn (turn to black YoY, -33.5% QoQ), which is above the market consensus of KRW360.7bn (FnGuide; May 26). We estimate Refining OP of KRW92.5bn (2.3% OPM), remaining in the black despite a QoQ retreat. Spot margins should inch up QoQ, but we expect OP to be undermined by decreases in inventory-related gains. Petrochemical OP is forecast at KRW126.9bn (+39.3% YoY, +29.1% QoQ; 11.0% OPM). PX/benzene spreads should improve while PO/PP margins remain strong.