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Elite Client Idea #52

Saras S.p.A ‘SRS’ (BIT Ticker: SRS; Price: €1.12/share)

SRS is one of the largest oil refiners in Italy - controlling 17% of its distillation capacity. It operates one of the most advanced plants - consistently generating refining margins (‘crack spreads’) in excess of its benchmark.

It generated revenues selling refined products (Gasoline, LPG, etc.) to Italy (27% of sales), Spain (11%), Other EU (17%), and Non-EU countries (44%). Electricity sales contributed 8% to revenues.

The industry faces regulatory pressure to transition from hydrocarbons to renewables – and is subject to windfall taxes and electricity tariff controls.

Its fortunes are dependent on the volatility of oil and the demand/supply balance of refined products. It’s also exposed to fluctuations in the EUR/USD rate, electricity prices, and CO2 allowances - which are managed using derivatives.

Management has cases pending against them for allegedly purchasing oil illegally from Kurdistan – this is legally assessed as a remote risk but they expect tax penalties of €75-80mn (payable in quarterly instalments of €4.7mn).

SRS generated ebitda-level losses in FY20 and FY14 but operating cash flows were negative only in FY20 during the pandemic.

It reported abnormally good performance after Russian supply was hit in FY22 – with TTM revenues of €16.29bn (FY21: €8.56bn), ebitda of €1.25bn (FY21: €267mn), and net profits of €479mn (FY21: €9mn).

Taking average revenues of ~€10bn, applying average ebitda margins of ~5%, and deducting depreciation and taxes results in average earnings of ~€230mn.

Derivatives can swing profits by €41mn on 20% moves in oil prices, and another €40mn on 10% moves in the EUR/USD rate - which is a notable risk.

The financial position (as at March 31st, 2023) is strong with net cash of €236mn. Most of the debt of €528mn is due only in 2028. Tangible equity stood at €1.31bn.

Returns on capital are satisfactory at ~17-18%.

The equity trades for ~€1.07bn, which is ~4.7x average earnings, and ~81% of tangible equity.

Dividends aren’t regular but the last payment of €181mn was satisfactory (shares now trade ex-div). However, management intends to pay accrued windfall taxes, and incur ‘catch-up’ capital expenditures of ~€260mn – therefore, dividends shouldn’t be expected at that rate.

Management expects invested capital in “new energy” to exceed the traditional business by 2026. This should temper enthusiasm for the stock - however, management’s record of capital efficiency implies these pronouncements may be for regulatory consumption.

Overall, the stock appears undervalued considering the competitive position and capital efficiency of this enterprise.

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