China Aviation (Singapore) Oil - Phillip Securities 2017-11-06: Hurt Near-term By Unexpected Events

China Aviation (Singapore) Oil - Phillip Securities 2017-11-06: Hurt Near-term By Unexpected Events CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation (Singapore) Oil - Hurt Near-term By Unexpected Events

  • China Aviation (Singapore) Oil's 9M17 profit from associates was in line with our full year expectation.
  • 1H17 net profit missed our full year expectation by 7%.
  • Trading business continued to grow the volume, but gross profit dropped due to a backwardation of jet fuel and hurricanes disrupting deliveries.
  • Investment in associates performed well, and we remain positive on the outlook.
  • We revise down FY17e and FY18e EPS forecasts by 13.1% and 11.3% respectively but maintain our BUY rating with an unchanged TP of S$2.00 based on a slightly lower average forward PER of 11.5x.



The Positives 


+ Trading business continued to expand: 

  • Revenue jumped by 44.9% YoY in 9M17, comprising of trading volume rising 19.8% YoY and oil prices up by 21.7% YoY. The volumes of middle distillates and other oil products increased by 7.4% YoY and 13.0% YoY respectively in 9M17. 
  • In 3Q17, the trading volume of other oil products recorded a new high of 8.2mn tonnes.

+ Profits from associates achieved a new high: 

  • Pudong’s contribution in 3Q17 helped profits from associates to deliver 10.4% YoY growth to US$21.5mn, surpassing last year record high. 
  • The strong performance in 3Q17 offset the slight drop in 2Q17. As a result, it managed to grow by 3.2% YoY to US$54.8mn in 9M17.


The Negatives 


- Unexpected unfavorable market conditions hit CAO: 

  • In 3Q17, gross profit dropped substantially by 58.3% YoY due mainly to the double whammy: 
    1. Backwardation on jet fuel market The backwardation, started in Jul-17, resulting in a narrower trading spread.
      Accordingly, CAO postponed the procurement of jet fuel to close to the delivery date to reduce the procurement cost when the futures price is lower than expected.
      Though the group still managed to eke out some profits from trading in 3Q17, it is significantly much lower than in a contango market where the group takes advantage of a wider spread by fixing a higher price.
    2. Hurricane season and fire at PetroChina Dalian refinery Five typhoons swept across the southern and southeastern coastline of China in 3Q17, resulting in the delay of shipping and disembark of fuels. In Aug-17, a fire occurred in the PetroChina’s refinery in Dalian caused a temporary outage of supply to CAO, and CAO had to procure from other refineries to make up the shortage of supply.
      Therefore, the scheduling and arrangement of urgent procurement led to costs being inflated during the period.


Outlook

  • It is worth noting that the force majeure such as weather and accidents occurred in 3Q17 is a non-recurring factor that only negatively impacts on the short-term operation. 
  • CAO’s trading margin will be lower in the backwardation market. However, since CAO continues to expand the global deployment and product mix to ramp up the trading volume, it still manages to grow profits. 
  • On the other hand, profits from associates, the key bottom-line driver, still has more room to grow since Pudong will be benefited from an uptick in air traffic in Pudong International Airport, especially with the upcoming operation of the fifth runway by the end of this year. 
  • We remain optimistic on CAO’s outlook and steady business portfolio.


Maintain Buy with unchanged TP of S$2.00 

  • We revise down our FY17e EPS (from 12.2 US cents to 10.6 US Cents) and FY18e EPS (from 14.1 US cents to 12.5 US cents), due to the negative market impacts. 
  • Based on a slightly lower average forward PER of 11.5x (previous 11.7x), FY18e EPS of 12.5 US cents, and estimated appreciation in USD, we maintain our BUY call with an unchanged target price of S$2.00 for FY18.




Chen Guangzhi Phillip Securities | http://www.poems.com.sg/ 2017-11-06
Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 2.000 Same 2.000



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