China Aviation Oil Singapore Corp (CAO SP) - UOB Kay Hian 2017-07-28: 2Q17 Cruising Along Just Fine

China Aviation Oil Singapore Corp (CAO SP) - UOB Kay Hian 2017-07-28: 2Q17 Cruising Along Just Fine CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil Singapore Corp (CAO SP) - 2Q17 Cruising Along Just Fine

  • In line with expectations, China Aviation Oil Singapore Corp (CAO) delivered another quality set of results in 2Q17 with profits rising 4.1% yoy on greater gains in its trading and optimisation activities.
  • There was some slight negative impact from the weakening renminbi on associate performance (-5.5% yoy) but we believe that the strong fundamentals for its star SPIA associate remain intact and contributions will sustain. 
  • Maintain BUY and target price of S$2.26 with a 2017 dividend yield of 2.7%.



RESULTS


Admirable performance in line with expectations. 

  • In line with expectations, China Aviation Oil Singapore Corp (CAO) reported 2Q17 net profit of US$24.6m (+4.1% yoy) lifted by greater gains in its trading and optimisation activities. As discussed previously, the 1Q17 revenue jump (+55.6% yoy) is a non-event as revenue for CAO is not meaningful.

Slight impact on associate contributions due to the weaker renminbi. 

  • Despite higher gross profit from increased refuelling volumes, CAO’s star, the SPIA associate, contributed slightly lower profits of US$16.1m in 2Q17 (2Q16: US$17.5m) due to the renminbi moving weaker against the US dollar. This led to associate contributions dropping 5.5% to US$18.3m from US$19.4m in 2Q16, offsetting overall gains from other associates. 
  • Profits for OKYC had risen US$0.3m (+22.8% yoy) and the loss for the newest associate, CNAF HKR, narrowed to US$0.2m (from US$0.3m in 2Q16) despite profits decreasing slightly by US$0.1m for TSN-PEKCL.


STOCK IMPACT


Contributions from star SPIA associate will sustain. 

  • We expect the SPIA associate to continue to generate strong recurring income for the group with growth rates of around 7% (in renminbi terms) amidst strong fundamentals such as Shanghai’s importance as a global business hub and the likely higher refuelling volumes. This is particularly so as the Shanghai airport builds a new terminal (aiming to be amongst the world’s top three busiest airports in 2019 and as China experiences a civil aviation boom). 
  • Nonetheless, as seen from 2Q17, there could still be negative impact to its profits from factors such as a weakening renminbi or a drop in oil prices.

Not expecting another exceptional year of 45% profit growth. 

  • 2017 results thus far have been in line with our expectations. As discussed previously, with oil prices no longer in reversal and hence a lack of inventory gains, we do not think the exceptional profit growth seen in 2016 will repeat itself in 2017. Instead, we are expecting a flattish slight profit growth in the single digits.


EARNINGS REVISION/RISK

  • With everything proceeding as expected, there is no change to our 2017-2019 forecasts.
  • The risk of oil prices heading downwards and geopolitical risk (ie Korean peninsula) will also impact CAO and its associates.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$2.26, 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/ 2017-07-28
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.26 Same 2.260



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