S-Oil: Cyclicals to See Earnings Improve
Target price raised to KRW110,000
We reiterate BUY on S-Oil and raise our TP by 17.7% to KRW110,000 to reflect upward earnings estimate revisions. We revise up 2021E/2022E NP attributable to controlling interests by 19.3%/15.7% based on adjustments to 2021 estimates for complex margin (USD5.90→USD6.50) and PX spread (USD198.00→USD215.00). Our new TP, derived using the P/B-ROE model, implies 15.8x P/E, 2.06x P/B based on 2021E earnings.
For 1Q21, we expect earnings to begin improving, with revenue/OP reaching KRW5.38tn (+3.6% YoY/+25.8% QoQ)/KRW388.5bn (TTB YoY/+317.1% QoQ), which is considerably higher than the market consensus of KRW318.5bn (FnGuide; Mar 10). We see Refining OP at KRW161.4bn (TTB QoQ/YoY; 4.0% OPM). The company should also enjoy an uplift from jumps in refining margin (USD7.80/bbl; +USD3.00 QoQ) and inventory-related gains. Petrochemical OP should reach USD99.3bn (+49.3% YoY; 9.9% OPM) thanks to a QoQ jump in PX/benzene spreads and PO sales volume.
Structural uptrend in oil prices and LSFO price climb
We forecast 2021E revenue of KRW23.47tn (+39.4% YoY) and OP of KRW1.13tn (TTB YoY). Increasing investments in new/renewable energy should curb oil production in the U.S., resulting in a structural rise in oil prices. In addition, COVID-19 vaccinations will allow more people to travel, placing upward pressure on fuel prices in 2H21. The recent rise in LSFO prices should also add earnings momentum; the sharp rise in marine freight traffic from 2H20 has hoisted up Singaporean LSFO prices 33.2% from USD60.60 at end-November to USD80.70 at end-February. Unlike HSFO sales, which eroded earnings, LSFO sales are contributing to earnings. (BUSINESSKOREA)