China Aviation Oil Singapore - RHB Invest 2018-03-01: Results Continue To Disappoint

China Aviation Oil Singapore - RHB Invest 2018-03-01: Results Continue To Disappoint CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil Singapore - Results Continue To Disappoint

  • China Aviation Oil’s (CAO) reported lower-than-expected 2017 results (90% of our and 94% of consensus 2017 estimate), with 4Q17 gross and net profit declining for a second consecutive quarter. A higher tax rate, along with volume decline and lower gains in the trading business, were the key reasons for weak 4Q results. 
  • With an expected slowdown in organic growth, deployment of its USD277m of cash for earnings accretive M&A could be a key re-rating catalyst for China Aviation Oil’s stock. 
  • Maintain NEUTRAL, with lower SGD1.60 Target Price (from SGD1.80, 1% upside) post earnings revisions.

Results continue to disappoint. 

  • China Aviation Oil’s (CAO) 4Q17 gross profit fell 21% y-o-y to USD8.3m, amidst lower volume and weaker gains for the trading business. Strong growth (+26% y-o-y) in contribution from associates more than offset the weak trading business and a sharp rise in operating and finance costs as 4Q17 PBT only declined 5% y-o-y to USD17.4m. 
  • CAO reported higher tax expense in 4Q17 amidst an increase in deferred tax liabilities and decline in deferred tax assets. It is guiding for tax expense to remain elevated during the forecast period, as a greater proportion of profit is expected to be generated from non-Singapore operations where tax rates are higher.

Trading business remains a drag. 

  • While we expected the trading business to remain weak in 4Q17, a sharp decline in volumes led to lower-than-estimated gains for the business. In 4Q17, volume for the trading business fell 9% y-o-y to 3.1m tonnes and revenue declined 35% y-o-y to USD684m. For 2017, volume and revenue for trading business were up 25% and 38%, respectively. 
  • We expect volumes to grow at a slower pace of 20% in 2018.

Jet fuel business and associates to support growth. 

  • China Aviation Oil’s jet fuel supply business, which remains a good proxy for the fast-growing Chinese aviation market, witnessed a volume growth of 8% in 2017. 
  • We expect China Aviation Oil to deliver similar volume growth in the jet fuel supply business during 2018-2019, with higher contribution from overseas (non-Chinese) operations. Shanghai Pudong International Airport Aviation Fuel Supply Co (SPIA), China Aviation Oil’s associate, accounted for 70% of China Aviation Oil’s PBT in 2017. With the 5th runway now in operation and the opening of a satellite terminal in 2019, Pudong Airport is expected to witness strong growth in aviation traffic – leading to higher earnings for SPIA.

Earnings accretive investment could re-rate the stock. 

  • Despite guiding the market in early 2017, China Aviation Oil is yet to put its strong cash balance to good use by seeking new opportunities for expansion through investments and M&As in synergetic and strategic oil-related assets and businesses. China Aviation Oil has recently employed M&A professionals who are mandated to deliver earnings accretive investments in 2018. 
  • While we believe inorganic growth could act as a re-rating catalyst, the timing and magnitude of such growth still remain uncertain.

Stock looks fairly priced. 

  • Amidst a slower organic growth outlook, we lower 2018F-2019F profit by 23% each. With modest 7% 2018F earnings growth and only inorganic growth expected to offer near-term re-rating catalysts, we maintain our NEUTRAL rating on China Aviation Oil. 
  • Our lower SGD1.60 Target Price is derived using an average of forward P/E, P/BV, EV/adjusted EBITDA and DCF of adjusted free cash flows.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2018-03-01
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.600 Down 1.800