Shaheen Project And Sustainable Investments To Boost Profitability Amid Rebounding Asian Demand

Key Takeaways

• Completion of the Shaheen Project and increased production capacity are expected to improve profitability through enhanced earnings in petrochemicals and low-carbon products.
  
• Anticipated recovery in Asian refining margins and demand growth in key markets could boost sales volumes, market fundamentals, and overall revenue.
  
• Declining oil prices and FX losses coupled with high debt levels and slow project progress threaten S-Oil's profitability and financial stability amidst rising competition.

Catalysts

S-Oil Corporation manufacture and sell oil refining, lube, and petrochemical products in South Korea.

• The completion of the Shaheen Project, aimed at responding to energy transition and improving long-term corporate value, is expected to bolster profitability. With 42% of EPC works completed, the project is likely to enhance future earnings through increased production capacities in petrochemicals and low-carbon products.
  
• The anticipated recovery in Asian refining margin due to seasonal demand growth and restricted supply, driven by tight operation rates and scheduled T&I, is likely to improve refining segment margins and contribute to better gross margins in the future.
  
• The re-start of Chinese post-pandemic diesel and jet fuel demand, combined with India's diesel demand pick-up post-monsoon, is expected to push up overall sales volume and revenue in the coming quarters, improving overall market fundamentals.
  
• Investments in sustainable aviation fuels and expansion into biofeedstock processing may enhance net margins by capitalizing on higher-margin, low-carbon products, aligning with global energy transition goals.
  
• Inclusion in the value of index and the company's consistent dividend policy may drive increased investor interest and stock price appreciation, improving long-term return on equity and shareholder value.

S-Oil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming S-Oil's revenue will decrease by -4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.2% today to 5.2% in 3 years time.
• Analysts expect earnings to reach ₩1710.3 billion (and earnings per share of ₩13675.67) by about December 2027, up from ₩67.8 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.6x on those 2027 earnings, down from 97.8x today. This future PE is lower than the current PE for the KR Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to grow by 2.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.69%, as per the Simply Wall St company report.

S-Oil Future Earnings Per Share Growth

Risks

• The Q3 financial results showed a drop in sales revenue by 7.6%, attributed to declines in international oil prices and FX rates, impacting the company’s revenue and reflecting potential volatility in future earnings.
  
• The refining business segment recorded a significant operating income loss of ₩573.7 billion in Q3 due to declining oil prices and FX losses, which could affect overall profitability and net margins.
  
• High net debt-to-equity ratio of 65.3% might pose a risk to financial stability, potentially impacting future earnings, especially if external economic conditions worsen or interest rates rise.
  
• The Shaheen Project is progressing slowly with only 42% completion as of October, which may delay expected returns and affect long-term capital returns and profitability.
  
• Potential increased exports from China following the issuance of new export quotas could depress regional refining margins, potentially impacting S-Oil’s revenue and earning capability due to heightened competition.

Valuation

• The analysts have a consensus price target of ₩80479.17 for S-Oil based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩110000.0, and the most bearish reporting a price target of just ₩59000.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₩32639.5 billion, earnings will come to ₩1710.3 billion, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of ₩57000.0, the analyst's price target of ₩80479.17 is 29.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.