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

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.

Associates drive earnings growth.

  • 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.

SPIA continues to shine as the crown jewel.

  • 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.

Jet fuel supply to China continues to grow.

  • 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.

Other oil products book y-o-y higher gross profit.

  • 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.

Maintain BUY.

  • 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