China Aviation Oil Singapore - RHB Invest 2017-07-28: Growing In Times Of Oil Price Uncertainty

China Aviation Oil Singapore - RHB Invest 2017-07-28: Growing In Times Of Oil Price Uncertainty CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil Singapore - Growing In Times Of Oil Price Uncertainty

  • Despite the volatility in oil prices, China Aviation Oil Singapore (CAO) booked USD25m net profit (+4% YoY, 48% of our 2017 estimate) in 2Q17, due to its leadership position in jet fuel trading, unique cost-plus business model and monopoly in supplying imported jet fuel to China’s aviation industry. 
  • While growth is still aided by higher sales volumes of jet fuel and other oil trading products, its USD260m net cash position does offer scope for inorganic growth as well. 
  • Maintain BUY and a SGD1.90 TP (14% upside), as CAO is still the best proxy to the rapidly-growing Asian aviation industry.

Organic volume growth from jet fuel business. 

  • Although China Aviation Oil (CAO) booked unexciting 2% YoY middle distillates sales volume growth in 2Q17, the jet fuel trading and supply volumes – reported under the same business segment – grew by 7% YoY to 4m tonnes. 
  • We reiterate that as a monopoly supplier of imported jet fuel into China, CAO remains a direct proxy to rapidly-growing outbound aviation traffic from China to rest of the world. With Chinese international passenger traffic registering double digit growth, we are optimistic of CAO’s jet fuel supply volumes growing at 8-15% over 2017-2019.

Other oil products are still profitable. 

  • Although trading volume for other oil products declined 12% YoY to 3.4m tonnes, the segment reported its seventh consecutive profitable quarter in 2Q17. While there was no disclosure on quarterly gross profit for this business segment, CAO highlighted that the 7% YoY growth in total gross profit was largely attributed to higher profits from other oil products trading business and optimisation activities. 
  • We remain confident of this segment reporting strong growth in 2017-2018, aided by double-digit volume growth and a gradual expansion in margins.

Lower associate earnings contribution was a forex translation issue. 

  • The share of profits from CAO’s associates dropped 5.5% YoY to USD18.3m for 2Q17. This was mainly attributable to lower profit contributions from Shanghai Pudong International Airport Aviation Fuel Supply Company (Shanghai Pudong), a key associate earnings contributor for CAO. 
  • The share of profits from Shanghai Pudong declined 8.2% YoY to USD16.1m, due to the weakening of the CNY against the USD. This, in turn, translated to a lower share of results despite higher revenue being reported by the associate from increased refuelling volume. 
  • CAO indicated that excluding the forex translation impact, the earnings contribution from Shanghai Pudong would have increased by double digits.

Remain optimistic on strong earnings growth outlook. 

  • Despite the post-results weakness in share price, which we believe was from some profit-taking, we remain bullish on CAO’s share price outlook as it remains on track to deliver steady earnings growth and higher dividend yields. 
  • We keep our earnings estimates and TP unchanged (S$1.90). 
  • We are projecting an estimated 16.6% growth in EPS in 2017, implying 0.61x 2017F PEG, which makes the stock a compelling investment. 
  • Downside risks to our call include the opening up of China’s aviation fuel market.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2017-07-28
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