China Aviation Oil Singapore Corp (CAO SP) - UOB Kay Hian 2017-11-03: 3Q17 Impacted By Backwardation Oil Market

China Aviation Oil Singapore Corp (CAO SP) - UOB Kay Hian 2017-11-03: 3Q17 Impacted By Backwardation Oil Market CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil Singapore Corp (CAO SP) - 3Q17 Impacted By Backwardation Oil Market

  • China Aviation Oil (CAO SP)’s 3Q17 performance was a slight miss as trading and optimisation activities were impacted by backwardation in the oil market. Nonetheless, a 10.4% yoy growth in associate contributions offset a large portion of the earnings drop. 
  • We believe normalisation of the disruption of supply, weather and eventually backwardation will occur in 4Q17 and CAO is still able to catch up and hit our 2017 forecast of single-digit profit growth on strong fundamentals from its star SPIA associate. 
  • Maintain BUY. Target price: S$2.26.


Impacted by oil market backwardation, 3Q17 performance was a slight miss. 

  • China Aviation Oil (CAO) reported lukewarm 3Q17 results with net profit dropping 7.74% yoy to US$21.4m. 
  • Operating profit fell 69.8% yoy to US$1.3m due to lower gains from trading and optimisation activities as the oil market slipped into backwardation with oil price volatility caused by production cuts, adverse weather conditions and refineries outages.
  • However, a 10.4% yoy increase in contribution from associates to S$21.5m offset a large portion of the drop.

Associate contributions grew 10.4% yoy. 

  • Contribution from CAO’s star, the SPIA associate, grew 8.2% yoy to US$18.9m in 3Q17 on higher refuelling volume and higher margins due to the rebound in oil prices in 3Q17. 
  • Contributions from another associate, Oilhub Korea Yeosu Co, also grew 27.7% yoy to US$1.8m. Their contributions largely offset the lower gross profit from trading and optimisation activities.


Normalisation in 4Q17. 

  • We believe 3Q17 gross and trading profits were abnormally impacted by the backwardation market. Hence, 4Q17 should see some levels of normalisation and we remain optimistic that CAO should still be able to hit our 2017 forecast of slightly flattish profit growth.

Contributions from star SPIA associate will sustain. 

  • We expect the SPIA associate to continue to generate strong recurring income for the group with growth of around 7% in 2018 (in renminbi terms) amid 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 among the world’s top three busiest airports in 2019 and as China experiences a civil aviation boom. 
  • Nonetheless, there is still volatility to its profitability as factors such as a weakening renminbi or volatility in oil prices would impact its contributions.


  • No change to our earnings estimates.


  • 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 reverse to a jet fuel futures contango market will likely enhance trading profits.
  • Any M&A announcements on earnings-accretive fuel assets will also likely result in share price re-rating.

Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-03
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.260 Same 2.260