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Sentiment improving amid gradual earnings recovery

Maintain Buy and TP of W79,000

We maintain our Buy rating and target price of W79,000 on S-Oil. Our target price is based on a P/B of 0.96x (vs. 0.8x previously), reflecting ROE improvements. Encouragingly, downward pressure on refining margins in Asia is easing due to decreased exports of lower-priced oil by Russia and Iran, and China’s gasoline/diesel/kerosene export volumes are likely to shrink following its recent export tax rebate?adjustments. We also believe valuation remains attractive, with the stock trading at a P/B of 0.76x.

While the firm could face funding pressures related to the Shaheen project (with related capex set at W3.5tr for 2025 and W1.5tr for 2026), we note that its debt-to-equity ratio is well-managed at 69.3%, and borrowing costs are not high. The current interest rate is 3.6% (variable rate), but this could decrease in the future. Also, corporate bonds to be issued in 2H25 will likely have a lower coupon rate compared with previous issuances (3.5%).

4Q24 review: In-line results thanks to a pickup in refining profit

For 4Q24, the company reported operating profit of W260.8bn, in line with the consensus (+2.6%). The refining business saw sharp improvement, swinging to a profit of W172.9bn (from a loss of W573.7bn in 3Q24) on: 1) positive inventory effects from higher year-end oil prices; and 2) a recovery in refining margins due to seasonal demand. Meanwhile, petrochemical profit slightly declined due to a narrower PX spread (US$187/tonne; -US$84 QoQ), while lube base oil earnings slightly worsened due to regular maintenance (opportunity loss of about W20bn).

1Q25 preview: Slight QoQ improvement likely

For 1Q25, we forecast operating profit at W296.3bn (+14% QoQ). The profit contribution of the lube base oil division should recover amid a normalization in utilization (post-maintenance) and favorable seasonality. For the petrochemical division, we see operating profit slightly improving due to the operation of a new downstream facility and recovering demand for gasoline blending components. While issues related to the fire at the second PX plant continue to affect utilization, we expect operations to normalize from April. For refining, we expect operating profit to remain largely flat QoQ. Refining margins (which have been squeezed by the recent sharp rise in oil prices) should gradually recover.