Refining Margin to Remain Higher Than Previous Levels
The author is an analyst of NH Investment & Securities. He can be reached at yk.choi@nhqv.com. -- Ed.
We initiate coverage on S-Oil with a Buy rating and TP of W150,000. Despite strong oil prices stemming from supply-side issues, the firm’s refining margin is on the rise. While oil prices are to stabilize downwards, refining margin should remain solid through 2023, helped by tight supply-demand conditions for petroleum products.
Despite downward stabilization of oil prices, refining margin to remain strong over mid/long term
We initiate coverage on S-Oil with a Buy rating and TP of W150,000. We use a SOTP valuation method for our TP calculation. For the refinery and lubricant oil divisions, we apply the 2023F peer average EV/EBITDA of 6.1x to 2022E~ 2024F average EBITDA. For the chemical division, we apply an EV/EBITDA of 3.4x, a 20% discount to the peer average of 4.2x, to 12-month forward EBITDA. The discount is attributed to the firm’s portfolio focus on general-use chemical products. Our TP of W150,000 is equivalent to a P/B of 1.8x (based on 2022E~2024F average BPS).
2H22 OP to remain at higher level than that seen in previous years
We forecast 2022E sales of W38.34tn (+39.6% y-y) and OP of W3,352.5bn (+56.6% y-y; OPM of 8.7%), with the earnings growth being driven by the petrochemical division (OP of W2,709bn (+198.3% y-y); OPM of 9.0%).
In 2H22, OP is projected to drop 41% from the 1H22 level to W1,248.3bn. But, it should remain higher than in previous years, with 33% y-y growth. After soaring in 2021, lubricant oil prices are forecast to normalize, as tight supply conditions ease on rising utilization rates at global oil firms. However, the extent of price decline should be limited due to yield adjustment for diesel production expansion. OP at the lubricant oil division should also exceed levels seen in previous years.
Over 2015~2017, S-Oil’s refining margin (reflecting OSP) showed an uptrend, averaging US$6.3/bbl. The figure is projected to exceed US$12/bbl in 2022 and US$10/bbl in 2023. Despite a likely gradual decline in oil prices, refining margin is to remain higher than previous levels.