On Wednesday, Citi maintained a Buy rating on S-Oil Corporation (010950:KS) (OTC: SOOCY) but lowered the price target to KRW70,000 from KRW84,000. The adjustment reflects updated modeling after considering the company's third-quarter results and revised margin forecasts.
The new forecast anticipates that the fiscal year 2024 earnings per share (EPS) could barely breakeven, despite a slight quarter-over-quarter gross refining margin (GRM) uptick anticipated in the fourth quarter due to winter seasonality and regional refinery run cuts.
The third quarter (Q3) earnings before interest and taxes (EBIT) for S-Oil Corporation showed a significant loss of KRW415 billion, a downturn from the second quarter's profit of KRW161 billion.
This loss was attributed to an inventory loss of approximately KRW286 billion, continued GRM challenges due to the smooth ramp-up of new refiners in the Middle East and Africa, high Asia-Europe clean tanker freight rates, a decline in aromatics, and oil demand recovery pacing slower than expected. However, the lubricants segment of S-Oil's business remained profitable.
Despite the challenging quarter, Citi notes that permanent refinery closures in Europe and the U.S. could potentially improve the global demand/supply balance next year. S-Oil's inclusion in Korea's 'Value-Up' index is mentioned, but the report suggests that the company's options to enhance shareholder returns might be limited due to a heavy capital expenditure burden.
Citi's revised price target of KRW70,000 is based on a constant 5x enterprise value to EBITDA (EV/EBITDA) multiple, though the valuation has been rolled forward from fiscal year 2025 to 2026 estimates. This change accounts for the lowered EPS projections for fiscal years 2025 and 2026 by 31-40%.
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