BSR – A resilient energy play – Initiation

• BSR is the leading refinery in Vietnam, playing a vital role in supplying fuel for nation and remaining high utilisation rate at above 100% for many years.
• Refining margin is resilient on the high base due to the lingering geopolitical crisis to bode well for refineries like BSR in the next couple of years.
• Initiate coverage on BSR with an ADD rating and TP of VND27,300

Vietnam’s highly efficient oil refinery, playing a vital role in national energy

Dung Quat Refinery (managed by BSR) with total investment of US$3bn has played a vital role in supplying fuel for nation since it went to operation, meeting c.35% of total domestic requirements. In contrast to Nghi Son refinery, BSR remains the high utilization rate up to 105-108% for many years, showing the high profitability except 2020 due to Covid-19 outbreak and oil prices crash.

Refining margin is resilient on the high base to bode well for refineries

In 1H22, refining margins have surged globally due to Western sanctions on Russia while refinery utilisation remains low. We expect crack spreads to cool down in coming months when strong profit is likely to trigger the recovery in refinery utilisation globally. But refining margin will remain high compared to prewar level in coming period due to the tight refined product market caused by the lingering Russia – Ukraine crisis and this will bode well for refineries including BSR. Overall, we forecast BSR’s FY22F net profit to surged 128.4% yoy on the crack spreads spike, then decreasing by 40.1% yoy in FY23F due to crack spreads cooling down and the periodic maintenance (but still 37% higher than 2021 level). After that, FY24F NP is expected to be back to growth trajectory in FY24F with a growth rate of 12.2% yoy.

The upgrade project promises to be new growth engine in long-term

BSR plans to implement the upgrade and expansion project for Dung Quat refinery (est. capex of US$1.26bn) from 2023 which could increase the capacity to by 17% to 7.6m tons annually. After completion, BSR can distillate sourer crude oils and supply higher quality products (Euro V) to the market. As the orientation on raising proportion of high value products, we believe in the feasibility of this project, and we consider it will be key driver for BSR’s business in long-term.

Initiate coverage with an ADD rating and target price (TP) of VND27,300

We initiate coverage on BSR with an ADD rating and TP of VND27,300, based on an equal weighting of FY23F target EV/EBITDA of 6.5x and FY23F target P/B of 1.5x. Potential upside catalysts are stronger-than-expected refined crack spreads and potential listing on the main bourse. Downside risks come from the decline in oil price/crack spreads and lower-than-expected production output.

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