China Aviation Oil - CIMB Research 2017-04-20: 1Q17 Hitting The Right Notes

CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil - 1Q17 Hitting the right notes

1Q17 net profit of US$25.3m rose 41.1% qoq and 4.7% yoy, and accounted for 25.6%/25.9% of our/consensus forecasts.
Increased trading optimisation activities boosted 1Q17 GP margin to 0.47% (4Q16: 0.32%), alleviating the fall in volumes traded (1Q17: 7.3m mt vs. 4Q16: 8.3m mt).
Associate contribution came in at US$14.9m (+11.8% qoq/+5.0% yoy).

Maintain Add and TP of S$2.28, based on 13x FY18F P/E (c.17% discount to peer average).

1Q17 net profit of US$25.3m was within expectations, accounting for 25.6% of our full-year estimate (US$98.8m).
Qoq net profit growth of 41.1% was driven by better GP margin of 0.47% (vs. 4Q16: 0.32%) as 4Q16 is seasonally weaker on lower trading optimisation activities.
Yoy, higher SPIA contribution drove the overall share of associate and JV contribution up by 5.1%.

Volumes fell 11.8% qoq largely due to a fall in other fuel volumes traded in the quarter (-20.7%) as CAO is still fine-tuning its crude oil trade operations; there could be upside to those volumes in the coming quarters once the process is completed, in our view.
An increase in GP/metric tonne (mt) for volumes traded to US$2.1 in 1Q17 (vs. US$1.2/mt in 4Q16) also mitigated the impact of lower volumes. According to CAO, this was on the back of higher optimisation gains from jet fuel trading.

Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA) was still the main contributor at US$12.9m, accounting for 87% of the share of associates and JV (US$14.9m). However, TCN-PEKCL’s profits of US$0.78m (vs. a loss of US$0.34m in 4Q16) provided strength to 1Q17 associate contribution.

As at 1Q17, CAO had a net cash position of 26.1 UScts/share. CAO is open to M&A opportunities, but it is selective.
In our view, it is highly likely to opt for strategic assets i.e. SPIA, or assets that give it more access to aviation hubs. In any case, the net cash position accords it financial flexibility to consider such opportunities.

We like CAO’s
1. imported (bonded) jet fuel supply monopoly, which makes it a proxy for China’s growing outbound travel;
2. expanding international footprint; it has gained access to world’s busiest airports i.e. Los Angeles International Airport (LAX) and Hong Kong International Airport (HKIA) that rank 4th and 8th respectively, based on Airports Council International's (ACI) preliminary 2016 rankings; and
3. strategic 39% associate-stake in exclusive fuel supplier for Shanghai Pudong Airport (9th busiest airport in 2016).

The stock currently trades at a CY18F P/E of 9.6x, c.40% discount to the global peer average of 15.6x, and a CY18F P/E of 7.5x (once the current net cash position of 26.1 UScts is stripped out). Our target price is based on a target P/E of 13x (c.17% discount to peer average).
Downside risks to our call are:
1. weaker-than-expected volume growth in jet fuel and other fuels;
2. lower margins due to lower trading optimisation activities; and
3. lower earnings from associates.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-04-20

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