China Aviation Oil Singapore Corp (CAO SP) - 1Q17 Another Smooth Sailing Quarter
- As expected, the continued oil contango trend benefitted CAO as it delivered strong 1Q17 results slightly ahead of our expectations with higher gains from oil trading optimisation activities.
- The stellar performance from SPIA is expected to continue, though at a less pronounced rate if oil prices trend downwards.
- We raise our 2017/18 earnings forecasts slightly and introduce our estimate for 2019.
- Maintain BUY with target price raised to S$2.26 with a 2017 dividend yield of 3%.
Strong results slightly ahead of expectation.
- Powered by greater gains from its trading and optimisation activities, China Aviation Oil Singapore Corp (CAO) reported a 1Q17 PATMI of US$25.3m (+4.72% yoy).
- As expected, the continued oil contango trend had benefitted CAO. Also as mentioned previously, revenue for CAO is not meaningful (profits are based on a fixed fee x volume instead). and as such the 1Q17 revenue jump (+126.14% yoy) is a non-event.
- All in all, we believe the 1Q17 results are positive, considering the absence of the US$1.14m in monies recovered from MF Global in 1Q16.
Stellar performance from star associate continues.
- With higher refuelling volumes and rebounding oil prices, the group’s star associate, SPIA, continued to grow its contribution by 7.1% yoy from US$12.09m in 1Q16 to US$12.95m in 1Q17.
- Its second major associate, OKYC saw slightly profit decline from US$1.36m in 1Q16 to US$1.34m in 1Q17, mainly attributable to exchange losses, despite higher profit from its tank storage leasing activities and mark-to-market interest swap gains. Nonetheless, oil tank storage facilities were running at full capacity at the end of 1Q17.
SPIA will continue to contribute.
- In view of Shanghai’s importance as a global business hub and the likelihood of higher refuelling volumes, we expect SPIA to continue to generate strong recurring income for the group with a growth rate of around 7%. However, profit gains due from oil price increases may not be sustainable if oil prices do not continue to trend upwards.
- Nonetheless, we note the potential for future growth as the Shanghai airport builds a new terminal (aiming to be amongst the world’s top three busiest airports in 2019 and the general China’s civil aviation boom.
- We have slightly raised our earnings growth forecasts for 2017/18 and introduce our 2019 forecast. We also reckon that there is significant upside risk to our estimates if the jet fuel contango market were to remain intact.
- The risk of oil prices heading downwards and geopolitical risk (ie Korean peninsula) will also impact CAO and its associates.
- Maintain BUY with target price raised to S$2.26 based on 14.4x 2017F PE, pegged at a 20% discount to peers’ average PE of 18x.
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- 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.