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Strengthening Earnings and Attractive Valuation: A Promising Outlook

S-Oil, a leading oil refining company, has seen robust key indicators in the oil refining industry, such as oil prices and refining margins. Despite sluggish 2Q23 results, there is anticipated strengthening in earnings stamina in 2H23. S-Oil's shares offer valuation appeal as they are trading at the low end of their historical price-to-book ratio. Therefore, we maintain a Buy rating and raise our target price on S-Oil to W96,000, a 7% increase.

Continuing increases in oil prices and refining margins have led us to boost our 2023 and 2024 operating profit projections by 14% and 4% respectively. In July, oil prices rose by about US$10 per barrel, and the Singapore refining margin increased by around US$5 per barrel. The Singapore refining margin currently stands at US$10 per barrel, matching the level of the boom period and exceeding the past average of US$5.5 per barrel. S-Oil's chemical division is also experiencing sound earnings due to robust gasoline margins and healthy spreads for aromatics products.

Although S-Oil's 2Q23 earnings were tepid with consolidated sales of W7.8tn (-13.6% q-q) and operating profit of W36.4bn (-92.9% q-q), there were opportunity losses due to regular maintenance. However, the firm's chemical and base oil domains contributed solid earnings, preventing the operating income from turning negative. The refining division experienced operating losses of W292.1bn (-4.9% OPM) due to inventory valuation losses and negative lagging effects from refining margin and oil price drops. On the other hand, the chemical division recorded operating profit of W82bn (+179.9% q-q; 8.1% OPM) thanks to strong spreads for aromatics, while the base oil division saw operating profit of W246.5bn (+25.9% q-q; 30.4% OPM).


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