China Aviation Oil - CIMB Research 2018-03-01: 4Q17 Within Expectations Despite Higher Tax

China Aviation Oil - CIMB Research 2018-03-01: 4Q17 Within Expectations Despite Higher Tax CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil - 4Q17 Within Expectations Despite Higher Tax

  • China Aviation Oil's FY17 core net profit of US$85.9m was within expectations at 96.9/95% of our/ Bloomberg consensus estimates (S$89.2m/S$90.8m).
  • This was despite higher tax expenses for the year; largely due to one-off tax expenses and recognition of deferred tax liabilities.
  • SPIA earnings should fuel FY18F net profit growth. China Aviation Oil also hinted that it is open to M&A opportunities this year.
  • 4.5 Scts DPS announced, largely in line with China Aviation Oil’s 30% payout policy.
  • Maintain ADD with lower Target Price of S$2.03 as we roll forward our valuation to CY19F, now based on slightly lower P/E of 12.5x (vs. 13.0x), still c.20% discount to peer average.

FY17 net profit within expectations, despite higher tax 

  • China Aviation Oil's FY17 EBIT unsurprisingly narrowed 18.7% y-o-y to US$20.7m (vs. CY16: US$25.4m) as jet fuel backwardation from 2H17 crimped gross profit margins. Tax expenses rose 133.2% y-o-y on recognition of deferred tax liabilities and one-off costs for the transfer of a shareholding of Oilhub Korea Yeosu Co., Ltd (OKYC). 
  • What was notable was the steady 7.8% y-o-y growth in associate earnings (S$71.5m) that cushioned the effect of the lower GP and higher tax expenses.
  • Overall, FY17 core net profit of US$85.9m, whilst 3.4% lower y-o-y, was within expectations.

Continued volume growth 

  • The volumes of middle distillates and other fuels rose 6.7% and 25.2% y-o-y, respectively.
  • We believe jet fuel volumes saw lower y-o-y growth largely due to lower trading activities as markets reclined to a backwardation from 3QCY17. Other oil product volumes soared, mainly on the uplift in fuel oil trading to Middle East, and stable y-o-y growth for crude oil and other transportation fuels.

SPIA continues to be the jewel in associate contributions 

  • SPIA accounted for 90% of FY17 associate earnings, and grew on the back of higher refuelling volumes (FY17: 4.5m; FY16: 4.1m metric tonnes) and higher oil prices. 
  • We understand that the Shanghai Pudong airport started trial runs on its fifth runway at end-17; this could bump refuelling volumes for SPIA, the airport's sole jet fuel refueller, in 2018F. 2019F volumes could grow further with the completion of the airport's satellite terminal which would boost its passenger capacity up to 80m.

Poised for M&A opportunities 

  • China Aviation Oil highlighted that it seeks synergistic M&A opportunities as it persists on expanding its global jet supply and trading network, complemented with trading in other products.
  • We were heartened to hear this as it could enhance its market presence given it is largely known as China-centric. As at end-17, China Aviation Oil had a net cash position of US$21ct/share; giving it ample balance sheet headroom to participate in acquisitions, in our view.

Maintain Add, with marginally lower target price of S$2.03 

  • We cut our FY18-19F EPS by 6.7/9.2% to reflect higher tax expenses and lower volumes given market is still in backwardation mode. We also introduce our FY20F forecasts.
  • Overall, we still like China Aviation Oil as a proxy for China’s growing outbound travel, and its expanding international footprint and healthy balance sheet. 
  • We keep our ADD call but lower our Target Price to S$2.03, now based on CY19F P/BV of 12.5x (from 13x CY18F), still a 20% discount to peer average of 15.7x.

Catalysts and risks 

  • Potential re-rating catalysts are higher product volumes and associate earnings; and possibility of M&As to fuel inorganic growth. Downside risks include lower volumes, margins and associate earnings.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-03-01
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.03 Down 2.080