BSR – Attractive valuation as crack spreads remain high – Update

• We retain our ADD rating with 24% upside and a 3.7% dividend yield. We increase our TP by 7% while the share price has increased by 3% compared to our last report.
• Our higher TP is due to the mixed impact of our FY24-25 EPS forecast adjustments and WACC revision.
• BSR trades at an FY24E EV/EBITDA of 4.4x, below the regional peer average of 6.4x.

Financial Highlights

• 4Q23 net profit grew by 28.5% yoy to VND2,279bn (US$93m) thanks to improvement of gasoline crack spread, reversal of inventories provision and surge in net interest income.
• BSR accumulated a huge net cash balance of VND38,121bn (US$1.56bn) at-end 2023 for future capex needs.
• We forecast NP to slide 23.2% yoy in FY24 mainly due to periodic maintenance for c.45 days.

Investment Thesis

Crack spreads to stay high in 2024 due to global geopolitical tensions

In 2024, we expect crack spreads to remain high as supply concerns increase due to escalating geopolitical tensions, especially Ukrainian attacks on Russian refineries. Meanwhile, Red Sea tensions and lower inventory levels of middle distillate products will also support crack spreads. Thus, we expect Asian gasoline and diesel crack spreads to stay high at US$14.8/bbl and US$21.5/bbl in FY24 vs US$15.2/bbl and US$23.8/bbl in FY23, respectively, which will be the key drivers for BSR’s earnings in FY24.

Dung Quat will maintain a high utilization rate

Given its policy of prioritizing domestic sources and its strategic location that allows it to dominate the central and southern markets, Dung Quat refinery (DQR) has consistently operated at an average of 102% of design capacity over the past decade and is projected to operate at 112% – 116% going forward after the fifth maintenance period.

Expansion is needed in order to meet long-term demandWe also expect BSR’s capacity expansion to bolster output growth in the context that both NSR and DQR are running beyond their designed capacity but only meet about 70% of domestic demand. The expansions are set to boost capacity by 17% in 2028, and focus on high-valued refined products (LPG, JetA1) and petrochemical products.

No progress last quarter on listing on main bourseDespite support from HOSE, the listing process is still stalled due to the overdue liabilities of subsidiary BSR-BF (discussed in our previous Update). BSR is still seeking further guidelines and a solution to solve this bottleneck. We expect the company to resolve this issue and complete the listing as soon as possible. This is still a potential re-rating catalyst for BSR’s share price in the future.

Valuation seems attractive given its high utilization and profitabilityOur TP implies a FY24E EV/EBITDA of 6.4x, which is in line with the regional peer average of 6.4x. Despite a 2024 earnings dip from maintenance, this valuation looks attractive due to BSR’s higher profitability and ultilisation compared to regional peers.

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