China Aviation Oil - CIMB Research 2017-11-02: 3Q17 Riding On Stable Associate Contribution

CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil - 3Q17 Riding On Stable Associate Contribution

China Aviation Oil's 3Q17 core net profit of US$21.4m was slightly below expectations at 23.0%/22.2% of our/consensus’ FY17F estimates (US$93.2m/US$96.4m).
9M17 core net profit accounted for 76.5% of our full-year forecast.
3Q17 associate earnings rose (+17.5% qoq/+10.4% yoy) on stronger SPIA and OKYC numbers; mitigating the GP miss caused by one-off costs and weaker trading gains .
We reduce our FY17F EPS forecast by 4.3%.

3Q17 / 9M17’s gross profit fell 58.3%/9.2% to US$4.3m / US$30.3m (vs. 3Q / 9M16: US$10.4m / US$33.5m) largely on one-off supply and operational costs incurred due to disruptions caused by weather and refineries outages which exacerbated the lower trading and optimisation gains of the quarter with the markets moving to a backwardation.
The lower GP undermined 3Q’s/9M17’s revenue growth (+32.6/+44.8%) led mostly by other fuel segments’ growth.

SPIA’s 3Q17/9M17 contribution rose by 8.2%/1.8% to US$18.9m/US$47.9m (vs. 3Q16 / 9M16: US$17.4m/US$47.0m) on higher refuelling volume and profit margin as oil prices rebounded in 3Q17.
But a positive surprise was better 3Q / 9M17 OKYC earnings of US$1.8m/US$4.5m (vs. 3Q/9M16: US$1.4m/US$3.9m 1H16: US$2.5m) on higher profits from tank storage leasing activities that ultimately led to a 3Q17/9M17 associate earnings of US$21.5m/US$71.3m.

As at 3Q17, CAO boasted no borrowings and was still in a net cash position of 21 UScts/share. 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 will give it more access to aviation hubs. In any case, the net cash position accords it financial flexibility to consider such opportunities.

Notwithstanding uncertainties in the oil market that may introduce gross margin swings, we still like CAO for its proxy position to China’s growing outbound travel and expanding international footprint that will underpin its longer-term prospects.
Moreover, near-term prospects are underpinned by a healthy balance sheet and by growing associate contributions, driven mainly by the 39% strategic stake in the exclusive fuel supplier for Shanghai Pudong Airport which will see airport capacity enhancements by FY18-19F.

We cut our FY17F EPS forecast by 4.3% on the back of lower GP earnings partly offset by higher associate contributions.
We maintain our Add call and TP of S$2.08 based on a target P/E of 13x (c.20% discount to peer average).
The stock currently trades at a CY18F P/E of 11.3x, a c.30.7% discount to the global peer average of 16.5x.
Downside risks are lower associates earnings; lower GP margins; and weaker product volume growth.
Re-rating catalysts are better GP margins and higher associate earnings.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-11-02

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