China Aviation Oil Singapore - RHB Invest 2016-11-03: Continues To Deliver Above Expectation Results

China Aviation Oil Singapore - RHB Invest 2016-11-03: Continues To Deliver Above Expectation Results CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil Singapore - Continues To Deliver Above Expectation Results

  • CAO’s 9M16 net profit of USD71m came in ahead of our estimate. 
  • While all business segments witnessed growth, outperformance was driven by a strong growth posted by associates. 
  • We do not factor in any acquisition in 2017. However, we expect CAO to still deliver 11% profit CAGR in 2017- 2018 aided by organic growth in its jet fuel supply business, growth trading of other oil products and rising contribution from associates. 
  • Following a 5-6% earnings upgrade, we increase TP to SGD1.61 (from SGD1.56, 12% upside) and upgrade CAO to BUY, as valuation looks compelling again.

Growth in volumes to continue. 

  • Jet fuel volume rose 19% to 10.9m tonnes in 9M16, aided by growth in China and increased business in the US. 
  • Volumes for the trading of other oil products rose 147% to 13.4m tonnes in 9M16. Jet fuel volume should continue to grow in line with rise in Chinese aviation traffic, while growth in trading of other oil products should be driven by China Aviation Oil Singapore Corp’s (CAO) continuing diversification into fuel oil. 
  • We conservatively estimate both business segments to register 8% pa volume growth during 2017-2018.

Other oil product stays profitable. 

  • Earnings from this segment tend to be volatile and more risky vis-à-vis its jet fuel supply and trading businesses. 
  • CAO had reported losses in this segment during 2014-2015. However, the segment has been profitable over all three quarters in 2016. 
  • We expect the segment to continue reporting growth in 2017-18 aided by a gradual expansion in margins.

Associates to do well. 

  • CAO’s key associate, the refueller at Shanghai Pudong International Airport, booked a 52% YoY rise in 9M16 contribution to USD47m, aided by higher refuelling volumes. 
  • Oilhub Korea Yeosu Co Ltd reported a profitable 9M16 backed by strong storage leasing activity. We expect associates to register 13-15% growth in 2017-2018.

Upgrade to BUY. 

  • We increase 2016F-2018F profit by 5-6% and adjust our TP to SGD1.61, which is based on unchanged blended valuation method. 
  • Key downside risks are the opening up of China’s aviation fuel supply market (which removes CAO’s current monopoly) and losses in the oil trading business from sudden oil price shocks. Key upside risks are stronger growth of bonded jet fuel imports into China and earnings accretive acquisition in 2016.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2016-11-03
RHB Invest SGX Stock Analyst Report BUY Upgrade NEUTRAL 1.61 Up 1.560