IBK Investment & Securities has raised its target price for S-OIL to 210,000 won, reflecting the increased profit contribution from its lubricants business and the sustainability of its earnings. Since lubricants account for nearly half of the company's operating profit, analysts suggest that a separate valuation for this segment is necessary, moving away from the traditional refinery-focused assessment. The investment recommendation remains a 'buy.'
Lee Dong-wook, a researcher at IBK Investment & Securities, stated in a report on October 16, "The key investment point for S-OIL is that the increased profit contribution from lubricants could change the overall valuation criteria for the company. There are limitations to estimating overall performance based solely on refining margins and international oil prices."
In the second quarter of this year, S-OIL's lubricants segment generated an operating profit of 477.4 billion won, accounting for 49.5% of the company's total operating profit of 965 billion won. The significant profits from the lubricants business have largely offset the one-time inventory profit decline in the refining sector, highlighting the growing importance of this segment.
Lee noted, "Given that lubricants account for a substantial portion of profits, it is essential to assign separate value to the sustainability and capital efficiency of this business. It is more important to assess how much profit can be maintained after supply normalizes rather than just the peak profit size."
Currently, the high lubricants spread is expected to narrow once production and logistics in the Middle East normalize. However, if client companies diversify their procurement sources and maintain repeat demand for approved lubricants, the likelihood of profits quickly returning to historical average levels is low.
Therefore, analysts argue that a differentiated valuation should be applied to the normalized profits of the lubricants segment compared to the core refining business. Even if lubricants profits decrease from current highs, an increase in confidence regarding earnings sustainability could lead to a higher valuation multiple, thereby increasing the company's overall value.
Lee added, "It is possible for both profit reductions and increases in corporate value to occur simultaneously this year, as a decrease in profit size could still lead to a higher valuation multiple due to increased confidence in sustainability."
Key future variables include the speed of the lubricants spread decline, sales volume, regional profitability, and cash flow from investments. If the lower bound of profits from the lubricants business increases and the burden of large-scale investments eases, improvements in profit composition and reductions in financial burdens could occur simultaneously.
Lee Dong-wook, a researcher at IBK Investment & Securities, stated in a report on October 16, "The key investment point for S-OIL is that the increased profit contribution from lubricants could change the overall valuation criteria for the company. There are limitations to estimating overall performance based solely on refining margins and international oil prices."
In the second quarter of this year, S-OIL's lubricants segment generated an operating profit of 477.4 billion won, accounting for 49.5% of the company's total operating profit of 965 billion won. The significant profits from the lubricants business have largely offset the one-time inventory profit decline in the refining sector, highlighting the growing importance of this segment.
Lee noted, "Given that lubricants account for a substantial portion of profits, it is essential to assign separate value to the sustainability and capital efficiency of this business. It is more important to assess how much profit can be maintained after supply normalizes rather than just the peak profit size."
Currently, the high lubricants spread is expected to narrow once production and logistics in the Middle East normalize. However, if client companies diversify their procurement sources and maintain repeat demand for approved lubricants, the likelihood of profits quickly returning to historical average levels is low.
Therefore, analysts argue that a differentiated valuation should be applied to the normalized profits of the lubricants segment compared to the core refining business. Even if lubricants profits decrease from current highs, an increase in confidence regarding earnings sustainability could lead to a higher valuation multiple, thereby increasing the company's overall value.
Lee added, "It is possible for both profit reductions and increases in corporate value to occur simultaneously this year, as a decrease in profit size could still lead to a higher valuation multiple due to increased confidence in sustainability."
Key future variables include the speed of the lubricants spread decline, sales volume, regional profitability, and cash flow from investments. If the lower bound of profits from the lubricants business increases and the burden of large-scale investments eases, improvements in profit composition and reductions in financial burdens could occur simultaneously.
* This article has been translated by AI.
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