China Aviation Oil Singapore Corp (CAO SP) - UOB Kay Hian 2017-07-28: 2Q17 Cruising Along Just Fine

CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil Singapore Corp (CAO SP) - 2Q17 Cruising Along Just Fine

In line with expectations, China Aviation Oil Singapore Corp (CAO) delivered another quality set of results in 2Q17 with profits rising 4.1% yoy on greater gains in its trading and optimisation activities.
There was some slight negative impact from the weakening renminbi on associate performance (-5.5% yoy) but we believe that the strong fundamentals for its star SPIA associate remain intact and contributions will sustain.

In line with expectations, China Aviation Oil Singapore Corp (CAO) reported 2Q17 net profit of US$24.6m (+4.1% yoy) lifted by greater gains in its trading and optimisation activities. As discussed previously, the 1Q17 revenue jump (+55.6% yoy) is a non-event as revenue for CAO is not meaningful.

Despite higher gross profit from increased refuelling volumes, CAO’s star, the SPIA associate, contributed slightly lower profits of US$16.1m in 2Q17 (2Q16: US$17.5m) due to the renminbi moving weaker against the US dollar. This led to associate contributions dropping 5.5% to US$18.3m from US$19.4m in 2Q16, offsetting overall gains from other associates.
Profits for OKYC had risen US$0.3m (+22.8% yoy) and the loss for the newest associate, CNAF HKR, narrowed to US$0.2m (from US$0.3m in 2Q16) despite profits decreasing slightly by US$0.1m for TSN-PEKCL.

We expect the SPIA associate to continue to generate strong recurring income for the group with growth rates of around 7% (in renminbi terms) amidst strong fundamentals such as Shanghai’s importance as a global business hub and the likely higher refuelling volumes. This is particularly so as the Shanghai airport builds a new terminal (aiming to be amongst the world’s top three busiest airports in 2019 and as China experiences a civil aviation boom).
Nonetheless, as seen from 2Q17, there could still be negative impact to its profits from factors such as a weakening renminbi or a drop in oil prices.

2017 results thus far have been in line with our expectations. As discussed previously, with oil prices no longer in reversal and hence a lack of inventory gains, we do not think the exceptional profit growth seen in 2016 will repeat itself in 2017. Instead, we are expecting a flattish slight profit growth in the single digits.

With everything proceeding as expected, there is no change to our 2017-2019 forecasts.
The risk of oil prices heading downwards and geopolitical risk (ie Korean peninsula) will also impact CAO and its associates.

Maintain BUY and target price of 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/ 2017-07-28

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.26 Same 2.260