China Aviation Oil - UOB Kay Hian 2016-07-29: 2Q16 Continues To Amaze With Stellar Results On Associate SPIA’s Performance

CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil Singapore Corp (CAO SP) - 2Q16: Continues To Amaze With Stellar Results On Associate SPIA’s Performance

CAO’s 2Q16 results came in above our expectation with the primary upside surprise being better profit contributions from its associates (profit contribution from its SPIA associate grew 38.1%).
Gross profits from jet fuel and other oil products grew by 7.6%, in line with our expectation of a Chinese aviation boom.
Going forward, we expect both the SPIA associate and its fuel distribution business to continue to perform. The drawdown of loan facilities is temporary and not a major concern.

China Aviation Oil Singapore Corp (CAO) reported a 2Q16 PATMI of US$23.6m (+32.8% yoy) on US$3.0b in revenue (+19.8% yoy).
Results were above our expectation with the primary positive surprise coming from better-than-expected profit contributions from associates which increased 43.5% yoy to US$19.4m.

On jet fuel and other oil 1mth 3mth products supply as well as the trading side of things, 2Q16 gross profits grew 7.6% to US$9.9m. This was mainly attributable to the increase in jet fuel volume supplied to China as well as higher profits from trading and optimisation activities, underpinned by the overall Chinese aviation boom and recovering oil prices.

Overall associate contribution grew 43.5% yoy to US$19.4m with the group’s crown jewel - its stake in Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA associate) - beating our expectation and FY16 NAV/Share (S$) impressing with a stellar 38.1% yoy growth in shared profit. This was underpinned by FY16 Net Cash/Share (S$) higher refueling volume and profit margin due to the rebound in oil prices.
While oil prices remain volatile, we expect refueling volume growth to be sustainable, particularly with the opening of Shanghai Disneyland.

We note that during the quarter, working capital increased along with a US$41.7m drawdown in short-term bank borrowings. We understand from the management that the situation is temporary and primarily due to capital needs from the fast expansion of its Hong Kong refueling subsidiary business.
As the group does not require any long-term borrowings for its existing business, the borrowings will likely be paid down shortly.

The stellar set of 2Q16 results re-iterates our belief that CAO is the right proxy for Singapore investors to tap China’s aviation industry boom.
Going forward, we expect CAO to continue to enjoy high single-digit growth for its jet fuel distribution business which is underpinned by the Chinese government’s push in the general aviation industry while profit contribution from its SPIA associate continues to grow.

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.

We have raised our earnings growth forecasts for 2016/17/18 by +20.4%/+10.1%/+9.6% respectively to factor in the faster-than-expected volume growth in SPIA

Maintain BUY and raise target price to S$1.90 (previously S$1.85) based on 14.4x 2017F PE, pegged at a 20% discount to peers’ average PE of 18x.

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/ 2016-07-29

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.90 Up 1.85