China Aviation Oil Singapore Corp (CAO SP) - UOB Kay Hian 2017-04-20: 1Q17 Another Smooth Sailing Quarter

CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil Singapore Corp (CAO SP) - 1Q17 Another Smooth Sailing Quarter

As expected, the continued oil contango trend benefitted CAO as it delivered strong 1Q17 results slightly ahead of our expectations with higher gains from oil trading optimisation activities.
The stellar performance from SPIA is expected to continue, though at a less pronounced rate if oil prices trend downwards.
We raise our 2017/18 earnings forecasts slightly and introduce our estimate for 2019.

Maintain BUY with target price raised to S$2.26 with a 2017 dividend yield of 3%.

Powered by greater gains from its trading and optimisation activities, China Aviation Oil Singapore Corp (CAO) reported a 1Q17 PATMI of US$25.3m (+4.72% yoy).
As expected, the continued oil contango trend had benefitted CAO. Also as mentioned previously, revenue for CAO is not meaningful (profits are based on a fixed fee x volume instead). and as such the 1Q17 revenue jump (+126.14% yoy) is a non-event.
All in all, we believe the 1Q17 results are positive, considering the absence of the US$1.14m in monies recovered from MF Global in 1Q16.

With higher refuelling volumes and rebounding oil prices, the group’s star associate, SPIA, continued to grow its contribution by 7.1% yoy from US$12.09m in 1Q16 to US$12.95m in 1Q17.
Its second major associate, OKYC saw slightly profit decline from US$1.36m in 1Q16 to US$1.34m in 1Q17, mainly attributable to exchange losses, despite higher profit from its tank storage leasing activities and mark-to-market interest swap gains. Nonetheless, oil tank storage facilities were running at full capacity at the end of 1Q17.

In view of Shanghai’s importance as a global business hub and the likelihood of higher refuelling volumes, we expect SPIA to continue to generate strong recurring income for the group with a growth rate of around 7%. However, profit gains due from oil price increases may not be sustainable if oil prices do not continue to trend upwards.
Nonetheless, we note the potential for future growth as the Shanghai airport builds a new terminal (aiming to be amongst the world’s top three busiest airports in 2019 and the general China’s civil aviation boom.

We have slightly raised our earnings growth forecasts for 2017/18 and introduce our 2019 forecast. We also reckon that there is significant upside risk to our estimates if the jet fuel contango market were to remain intact.
The risk of oil prices heading downwards and geopolitical risk (ie Korean peninsula) will also impact CAO and its associates.

Maintain BUY with target price raised to S$2.26 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/ 2017-04-20

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.260 Up 2.210