China Aviation Oil Singapore - RHB Invest 2017-11-03: Time To Take Some Money Off The Table

China Aviation Oil Singapore - RHB Invest 2017-11-03: Time To Take Some Money Off The Table CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil Singapore - Time To Take Some Money Off The Table

  • China Aviation Oil (CAO) reported lower-than-expected 9M17 results (69% of our 2017 estimate), with 3Q17 gross and net profit declining for the first time in 10 quarters. 
  • Lower gains from trading activity and higher costs were the key reasons for its weak performance. 
  • While jet fuel trading volume continues to grow (+7% YoY), we downgrade CAO to NEUTRAL (from Buy) amidst increased uncertainty in the trading business and poor visibility on the M&A timeline. We lower our TP to SGD1.80 (from SGD1.90, 2% upside).

Jet fuel business continues to grow. 

  • China Aviation Oil’s (CAO) jet fuel supply business, which remains a good proxy for the rapidly-growing Chinese aviation market, witnessed a volume growth of 7% YoY in 3Q17. This strong growth was completely offset by a decline in volume for other related middle distillate products, which declined 26% YoY. 
  • The middle distillate volume remained unchanged YoY, at 5.2m tonnes, in 3Q17.

Trading business drags profits lower. 

  • China Aviation Oil's 3Q17 gross profit fell 58% YoY to USD4.3m, amidst lower gains from trading and optimisation activities as the oil market reclined to backwardation during the quarter. The increase in operational costs incurred, due to various supply disruptions caused by weather and refineries outage, also aggravated the situation and dragged gross profit lower. 
  • While the one-off increase in operational costs should disappear, we expect the weakness in its trading business to persist in 4Q17 as well.

Associates continue to support profit growth. 

  • Profit contributions from associates accounted for 94% of China Aviation Oil's PBT in 3Q17. The share of profits from associates of USD21.5m (+10.4% YoY) was driven by higher contributions from Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA) and Oilhub Korea Yeosu Co. (OKYC)
  • The share of profits from SPIA grew 8.2% YoY to USD18.9m amidst due to higher refuelling volume and a wider profit margin amidst a rebound in oil prices.

Its large cash pile has not been put to use yet. 

  • China Aviation Oil's net cash position of USD178m accounts for 16% of the group’s market capitalisation. 
  • China Aviation Oil has been trying to put its cash to good use by seeking new opportunities for expansion through investments and M&As in synergetic and strategic oil-related assets and businesses globally. However, we have not seen any progress being made during 2017. 
  • China Aviation Oil recently employed M&A professionals to speed up the inorganic growth process, with results likely to be seen only in 2018.

Downgrade to NEUTRAL. 

  • To account for weak profits from its trading business, we lower China Aviation Oil's 2017 net profit estimate by 8% to USD95m (from USD104m). This also lowers our TP to SGD1.80 (from SGD1.90). 
  • With only a 2% upside to our TP and the lack of near term re-rating catalysts, we downgrade China Aviation Oil to NEUTRAL.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2017-11-03
RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 1.80 Down 1.900