China Aviation Oil - CIMB Research 2017-07-27: 2Q17 Taking A Slight Breather On SPIA

China Aviation Oil - CIMB Research 2017-07-27: 2Q17: Taking A Slight Breather On SPIA CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil - 2Q17: Taking A Slight Breather On SPIA

  • We deem the China Aviation Oil's 2H17 net profit of US$49.9m (50.5% of our/consensus forecasts) as slightly below expectations on weaker-than-expected SPIA earnings.
  • Shanghai Pudong International Airport Aviation Fuel Supply (SPIA)’s 1H17 contributions slid 1.9% yoy to US$29m on a weaker Rmb vs. US$, according to CAO.
  • We cut our EPS but still like the stock for its healthy balance sheet and prime aviation proposition. CAO remains net cash, with 30 UScts net cash/share (1Q17: 26 UScts).
  • Maintain Add, but with lower Target Price to S$2.08 (from S$2.20), based on unchanged 13x FY18F P/E (c.25% discount to peer average).

1H17 EBIT driven by higher volumes 

  • 1H17 EBIT was up 11.6% yoy at US$17.9m, largely on sustained growth in volumes.
  • Middle distillate volumes grew 11.7% to 9.5m tonnes (vs. 2H16: 8.5m tonnes) on higher jet fuel supply and trading, with robust demand from the Chinese civil aviation industry, and growing international footprint, whilst other fuels volume grew 20.7% to 6.1m tonnes (vs. 2H16: 5.1m tonnes), underpinned by demand for fuel oil in the Middle East and crude oil by Chinese refineries.

Associate earnings held back by SPIA contribution 

  • Despite meeting 45.2% of our full-year forecast (US$64.3m), SPIA’s 1H17 contribution narrowed by 1.9% on softer 2Q17 contribution of US$16.1m (vs. 2Q16 SPIA contribution of US$17.5m) on the back of a weaker Rmb against the US$. This is despite increased refueling volumes of 2.1m tonnes (vs. 1H16: 2.0m tonnes). 
  • Better OKYC earnings of US$2.7m (vs. 1H16: US$2.5m) and lower losses from CNAF HK of US$0.4m (vs. loss of US$0.5m in 1H16) mitigated overall slide in 1H16’s associate contributions (-1.0% yoy).

Balance sheet stays healthy 

  • As at 2Q17, CAO was in a net cash position of 30 UScts/share post paring off debt of US$50m in the quarter. CAO has mentioned that it is open to M&A opportunities, but 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.

Cut FY17-19F EPS by 5.6-5.8% 

  • We turn slightly more conservative on our SPIA forecasts due to potential weakness in Rmb vs. US$. We also note movements in jet fuel prices have narrowed in the current year (in tune with crude oil prices) which could imply lower mark-to-market inventory gains for SPIA in FY17F. 
  • As such, we lower our SPIA FY17F/18F/19F estimates by 9.6% to US$58.7m/US$62.2m/ US$71.5m (from US$64.3/US$68.1m/US$78.4m). This reduces our EPS forecasts by 5.8%/5.5%/5.6% for the respective years.

Prime aviation proposition 

  • We like CAO for its proxy position to China’s growing outbound travel and expanding international footprint that has gained it access to world’s busiest airports i.e. Los Angeles International Airport (LAX) and Hong Kong International Airport (HKIA). 
  • Moreover, its strategic 39% associate stake in the exclusive fuel supplier for Shanghai Pudong Airport would provide upsides once airport capacity enhancements emerge in FY18-19F.

Maintain Add 

  • We maintain our Add call with a lower TP of S$2.08. 
  • The stock currently trades at a CY18F P/E of 10.1x, c.41.7% discount to the global peer average of 15.0x. Our target price is based on a target P/E of 13x (c.25% 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/ 2017-07-27
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.08 Down 2.200