China Aviation Oil Singapore Corp (CAO SP) - UOB Kay Hian 2016-11-03: On Track For Record Performance Despite Macro Weakness

China Aviation Oil Singapore Corp (CAO SP) - UOB Kay Hian 2016-11-03: On Track For Record Performance Despite Macro Weakness CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil Singapore Corp (CAO SP) - On Track For Record Performance Despite Macro Weakness

  • CAO’s 3Q16 results came in above our expectation with the primary upside surprise being better profit contributions from its associates. 
  • Going forward, management expects both the SPIA associate and its fuel distribution business to continue to perform, and the company is on track for a record full-year performance. 
  • Maintain BUY with an unchanged target price of S$1.90. 
  • Note that there are significant upside risks to our estimates if the jet fuel contango market were to stay.


RESULTS


Results above expectation due to strong associates’ contribution. 

  • China Aviation Oil Singapore Corp (CAO) reported a 3Q16 PATMI of US$23.2m (+31.0% yoy) on US$3.9b in revenue (+64.2% yoy). 
  • Results were above our expectation with the primary positive surprise coming from better-than-expected profit contributions from associates, which jumped 100.4% yoy to US$19.5m.

Robust SPIA associate performance. 

  • Overall associate contribution grew 43.5% yoy to US$19.5m with the group’s crown jewel - its stake in Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA associate) - beating our expectation and impressing with a stellar 76.3% yoy growth in shared profit to US$17.4m. This was underpinned by higher refuelling volume and profit margin due to the rebound in oil prices. 
  • Note that we estimate that 30% of the US$17.4m shared profits is attributable to the increase in oil price which may not be sustainable. However the low-teen growth in refuelling volume is sustainable going forward.

Outlook remains bright despite macro weakness. 

  • Despite the macro uncertainties, management expects CAO to continue to benefit from the robust growth in China’s civil aviation industry and the global aviation industry. The company stands in good stead to further expand its aviation marketing business outside of China and diversify its trading business activities through building a global jet fuel supply and trading network.


STOCK IMPACT


SPIA associate will continue to shine as the star performer. 

  • In view of the success of Shanghai Disneyland as well as the increasing importance of Shanghai as a global business hub, we expect SPIA to continue to generate strong recurring income for the group with growth rates expected to increase to an even more impressive 12%. 
  • We further note the potential for future growth as the Shanghai airport builds a new terminal that will allow it to become one of the world’s top three busiest airports in 2019.

Expect record full-year performance and dividends.

  • The stellar 3Q results have once again reaffirmed our belief that the company is on track for a record full-year performance.
  • Based on the 30% earnings payout dividend policy, we also expect the company to pay out record dividends of S$0.04/share, translating to an attractive yield of 2.8%.


EARNINGS REVISION/RISK

  • We have raised our earnings growth forecasts for 2016 marginally by 1.6% but kept our 2017-18 forecasts unchanged. 
  • We also reckon that there are significant upside risks to our estimates if the jet fuel contango market were to stay.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price unchanged at S$1.90 based on 14.4x 2017F PE, pegged at a 20% discount to peers’ average PE of 18x.


SHARE PRICE CATALYST

  • A steeper jet fuel future contango market will likely enhance trading profits.
  • Any M&A announcements on earnings-accretive fuel assets will also likely result in share price reviews.




Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-03
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.900 Same 1.900




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