China Aviation Oil - RHB Invest 2018-05-10: First Signs Of Recovery In Earnings Growth

CHINA AVIATION OIL(S) CORP LTD SGX: G92

China Aviation Oil (CAO) - First Signs Of Recovery In Earnings Growth

Maintain BUY, with an unchanged SGD1.80 Target Price offering a 15% upside, as we remain positive on earnings growing again in 2018.
In addition, the completion of an earnings-accretive M&A during 2H18 or early 2019 could lead to a re-rating of the stock.
CAO’s 1Q18 results are a tad ahead of expectations, with recurring net profit growing 14% y-o-y to USD26.9m.

As expected this was aided by a strong contribution from SPIA and the increase in supply of jet fuel volume into Chinese aviation traffic, which grew 40% and 14% respectively.

While operating profit was down 27% y-o-y to USD7.1m, China Aviation Oil’s (CAO) 1Q18 PBT grew 15% y-o-y to USD28.5m. This was largely aided by strong growth registered by earnings from associates, which grew 40.7% y-o-y to USD20.9m.
Except for China National Aviation Fuel TSN-PEK Pipeline Transportation Corp Ltd, which saw its earnings contribution decline by 22% to USD0.6m, all associates of CAO registered positive growth in the quarter.

Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), a 33%-owned associate of CAO that offers aircraft refuelling services at Shanghai Airport, witnessed a 46% growth in earnings to USD18.9m.
Adjusted for forex gains, the growth (based in CNY terms) was 34.7%. With upcoming capacity expansion at the Shanghai airport, we maintain that SPIA could continue to register strong growth over next few years.

Volumes for supply and trading of jet fuel in China declined 14% y-o-y in 1Q18 to 3.3m tonnes. However, based on our discussion with CAO, we understand that the business of jet fuel supply into Chinese aviation traffic, which operates on a cost-plus fixed USD per tonne margin, registered mid-teens growth in volume for 1Q18.
We assess that jet fuel trading volumes would have declined by more than 40% in 1Q18.

Based on estimates derived from our financial model, we assess that CAO’s “other oil products” business segment has now remained profitable for 10 consecutive quarters.
We assess that gross profit for this segment could have improved significantly, on the back of a 23% growth in volumes and better product mix in the trading portfolio.

We believe that the strong set of results will help in building investor confidence in the stock and lead to a reversal of its recent share price weakness. We remain bullish on CAO’s share price outlook, as it is still on track to deliver steady earnings growth in 2018 after a weak 2017.
We revise our revenue estimates to account for new forecasted crude oil prices and the USD/SGD rate, and lift our 2018F-2020F EPS by 1-3%.
We also expect it to book an estimated 15% y-o-y growth in EPS in 2018, implying 0.78x2018F PEG – which makes the stock a compelling investment.

Shekhar Jaiswal RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-10

SGX Stock Analyst Report BUY Maintain BUY 1.800 Same 1.800