[Into the Stocks] S-Oil "Should We Buy or Not?"... Timing Is Crucial

[Asia Economy Reporter Lee Seon-ae] Buy vs Hold. S-Oil, which posted an operating loss exceeding 1 trillion KRW in the first quarter of last year due to the impact of COVID-19, attracted attention from the financial investment industry by announcing a surprise performance in the first quarter of this year. Since then, numerous investment opinion reports have been released. The general investment opinion is Buy, but Neutral and Hold opinions have also appeared. While some recommend an immediate buy call, others maintain a buy opinion but suggest that investment should be approached cautiously by confirming a rebound in the refining business segment.

◆Stock Price and Earnings at Bottom Now, "Buy Immediately"

On the 30th, S-Oil started trading at 88,400 KRW. It closed at 88,000 KRW the previous day, marking a 25.1% increase in stock price since the beginning of the year. The stock price, which had been hovering in the 70,000 KRW range, surpassed 80,000 KRW and rose, seemingly due to performance expectations. S-Oil recorded an operating profit of 629.2 billion KRW in the first quarter of this year, turning profitable from an operating loss of 1.0073 trillion KRW in the same period last year. This performance is the highest quarterly operating profit in the past five years. Notably, it recorded an 'earnings surprise' by nearly doubling market expectations. According to financial information provider FnGuide, S-Oil was expected to earn 340.8 billion KRW in operating profit in the first quarter of this year.

As performance expectations rise, target price upgrades are flooding in. Hana Financial Investment raised the target price from 95,000 KRW to 130,000 KRW. They also recommended an accelerated aggressive buy, citing two reasons. First, closures of facilities centered in the U.S. amounting to 2 million b/d are scheduled until next year, and the U.S. refinery utilization rate has already risen to 85%, making it highly likely that the global supply-demand balance will fully normalize in the second half. Second, the end of China's large-scale expansion cycle from 2018 to 2020 and the recovery of suppressed PX demand due to vaccine distribution are expected to restore profitability, benefiting from increased global infrastructure investment.

Yoon Jae-sung, a researcher at Hana Financial Investment, said, "Based on these two grounds, annual performance estimates are expected to be significantly revised upward. The current annual operating profit consensus is 1.1 trillion KRW, but Hana Financial Investment estimates 2.2 trillion KRW," adding, "For cyclical companies, the first stock rally occurs when suppressed estimates are significantly revised upward, so I advise an accelerated buy call earlier than expected."

Meritz Securities also emphasized buying, stating that the current point is the bottom for S-Oil's stock price. Noh Woo-ho, a researcher at Meritz Securities, said, "At this point, from a mid- to short-term perspective, the refining industry rebound is imminent, and both earnings and stock price are at the bottom," recommending it as the top pick in the refining sector. Meritz Securities forecasted a trend recovery in the refining industry this year. Based on this, they estimated the normalization of S-Oil's dividend policy (expected DPS of 4,200 KRW in 2021, payout ratio of 30%). Additionally, they highly valued S-Oil's participation in the eco-friendly energy paradigm by starting equity investment in next-generation fuel cell SOFC development companies with high efficiency in combined power generation, expanding its business area beyond pure refining.

Hyundai Motor Securities gave a buy opinion, noting that differentiated fundamentals that maintain high profitability even at the worst refining margin levels have been confirmed. Kang Dong-jin, a researcher at Hyundai Motor Securities, said, "Dividends, growth, and financial structure improvements are all expected to continue," advising, "S-Oil has sufficient capacity to secure mid- to long-term growth engines, so mid- to long-term investment is necessary considering this."

◆Refining Margin Weakness Forecast "Need to Confirm Refining Industry Rebound"

NH Investment & Securities presented a Neutral/Hold investment opinion. They judged that the quarterly operating profit surprise due to inventory valuation gains and a sharp rise in lubricant base oil margins is a one-time event, and that the structural weakness of refining margins continues. First, they analyzed that about 320 billion KRW of one-time gains were reflected, including 280 billion KRW from inventory-related gains and 40 billion KRW from exchange rate effects. The lubricant base oil spread surged to its maximum, with operating profit in the lubricant base oil segment reaching 189 billion KRW, the highest since 2011. This was attributed to a decline in regional refinery utilization rates to the 73% range, leading to reduced raw materials and production volume for lubricant base oil, with little demand increase.

Hwang Yoo-sik, a researcher at NH Investment & Securities, said, "The petrochemical segment is expected to increase operating profit from 98 billion KRW in the first quarter to 123 billion KRW in the second quarter," adding, "However, due to weak refining margins, global refinery utilization rates remained very low, and even if demand recovers, refinery utilization rates will rise, limiting profitability recovery."

He continued, "Structural weakness in refining margins persists, and refining margin weakness is expected to continue due to increased refinery utilization rates at other companies, so the investment opinion is Hold," adding, "However, reflecting the upward revision of operating profit estimates, the target price was adjusted from 72,000 KRW to 82,000 KRW."

Daishin Securities maintained a Buy rating and raised the target price by 10.5% to 105,000 KRW but advised caution regarding the timing of investment. Han Sang-won, a researcher at Daishin Securities, said, "Although the target price was raised due to changes in earnings estimates, the speed of recovery in the refining business is the key," advising, "Rather than excessive immediate expectations, a strategy of responding while confirming a rebound in refining margins is effective." He added, "The direction of recovery in oil demand and refining industry is clear," and "We expect a meaningful rebound in refining margins along with a turnaround in jet fuel demand in the second half."

◆Ultimately, Trust in S-Oil's 'Decarbonization' Efforts

S-Oil recorded sales of 16.8297 trillion KRW and an operating loss of 1.0877 trillion KRW in 2020. While the refining segment posted a massive loss of 1.696 trillion KRW, the petrochemical and lubricant base oil segments earned operating profits of 182 billion KRW and 426.3 billion KRW, respectively. S-Oil is actively pursuing transformation into an energy and chemical company for sustainable growth. In response to high performance volatility in the refining segment and mid- to long-term decline in oil demand, it is increasing investments in non-refining segments such as petrochemicals and various new businesses.

Conservative views on S-Oil stem from the 'refining business,' so these changes at S-Oil are factors that brighten future stock growth potential. Reducing dependence on the core refining business and strengthening the petrochemical business is part of the new growth strategy 'Vision 2030.' S-Oil completed the refining-petrochemical integrated facility (RUC&ODC) in 2018 with an investment of 5 trillion KRW and is promoting the 'Shahin Project,' the second phase petrochemical project in Ulsan.

To achieve Vision 2030, S-Oil is maximizing profitability in existing refining, petrochemical, and lubricant businesses while actively exploring entry into new business areas such as fuel cells and recycling. In March, it signed an investment contract with next-generation fuel cell company FCI and has officially entered the hydrogen energy business. S-Oil invested about 8.2 billion KRW in FCI, acquiring a 20% stake.

It also plans to enter the entire hydrogen industry, from production to distribution and sales. To this end, S-Oil is reviewing projects involving green hydrogen and green ammonia through cooperation with its major shareholder Saudi Aramco, as well as liquefied hydrogen production and distribution businesses. Additionally, it is considering introducing a combined hydrogen charging station in Seoul city and recently joined the special purpose corporation Co-HyGen, which is being promoted by related industries to build hydrogen charging infrastructure for buses and trucks.

This content was produced with the assistance of AI translation services.