China Aviation Oil - CGS-CIMB 2018-05-11: 1Q18 Cruising Within Expectations

China Aviation Oil - CGS-CIMB 2018-05-11: 1Q18: Cruising Within Expectations CHINA AVIATION OIL(S) CORP LTD SGX: G92

China Aviation Oil (CAO) - 1Q18: Cruising Within Expectations

  • China Aviation Oil’s 1Q18 core net profit of US$27.0m was within expectations, at 29.1%/28.6% of our/consensus FY18F estimates (S$92.4m/S$94.1m). 1Q is typically seasonally strong.
  • EBIT was lower y-o-y, largely on lower 1Q18 margins due to the lower trading and optimisation activities with the jet fuel backwardation scenario persisting. However, strong associate earnings growth, led by SPIA’s earnings, drove the 14.4% y-o-y core net profit growth in 1Q18.
  • CAO remained in net cash position of 19.8UScts/share at end-1Q18. M&A goals were guided at end-17.
  • Maintain ADD and Target Price, based on 12.5x FY19F P/E (c.20% discount to peer average).

1Q18 net profit within expectations; 1Q seasonally strong

  • China Aviation Oil’s 1Q18 EBIT unsurprisingly narrowed 26.2% y-o-y to US$7.1m (vs. 1Q17: US$9.6m) as jet fuel backwardation since 1H17 led to lower y-o-y gross profit margins (GPM). 
  • However, associate earnings (US$21.9m), which grew 24.7% q-o-q/40.7% y-o-y, cushioned the overall impact of lower EBIT and higher tax expenses (+47.5% y-o-y on recognition of deferred tax liabilities and provisions for income tax of a subsidiary). This led to a 1Q18 core net profit that rose 14.4% y-o-y.

Headline volumes shrank; backwardation moderates GPs

  • 1Q18 middle distillates volumes shrank 15.4% q-o-q/6.4% q-o-q to 4.3m metric tonnes on lower trading and optimisation activities. Other oil product volumes, however, continued to grow, +6.1% q-o-q/+22.4% y-o-y in 1Q18, mainly due to the uplift in crude and fuel oil trading volumes. 
  • Overall, GP of S$13.2m was down 14.6% y-o-y largely due to the backwardation environment for jet fuel which is the main driver of GPMs, in our view.

Stellar associate performance driven by SPIA and OKYC growth

  • SPIA’s (90.1% of 1Q18 associate earnings) earnings grew 16.3% q-o-q/46.1% y-o-y to S$18.9m (4Q17/1Q17: US$16.3m/US$12.9m) due to higher foreign exchange gain and investment income. 
  • CNAF HKR’s losses moderated to US$0.17m from 4Q17/1Q17’s US$0.23m/US$0.21m. 
  • The Shanghai Pudong airport started trial runs on its fifth runway at end-17; this could drive FY18F refuelling volumes for SPIA. 2019F volumes could grow further with the completion of its satellite terminal (to boost passenger capacity to 80m).

Poised for M&A opportunities

  • China Aviation Oil (CAO) highlighted in end-17 that it is seeking synergistic M&A opportunities as it intends to expand its global jet supply and trading network, complemented with trading in other products. We were heartened to hear this as it could enhance CAO’s market presence given it is largely known as a China-centric company. 
  • As at end-1Q18, CAO had a net cash position of 19.8UScts/share, giving it ample balance sheet headroom to participate in acquisitions, in our view.

Maintain Add and Target Price of S$2.03

  • Overall, we still like China Aviation Oil (CAO) as a proxy for China’s growing outbound travel, and its expanding international footprint and healthy balance sheet. 
  • We maintain ADD with our Target Price, still based on 12.5x FY19F P/BV, c.20% discount to peer average of 15.8x.

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 CGS-CIMB | LIM Siew Khee CGS-CIMB | 2018-05-11
SGX Stock Analyst Report ADD Maintain ADD 2.030 Same 2.030