China Aviation Oil Singapore Corp - UOB Kay Hian 2018-05-10: 1Q18 Remaining Cautiously Optimistic In View Of Volatile Markets

CHINA AVIATION OIL(S) CORP LTD SGX: G92

China Aviation Oil Singapore Corp - 1q18: Remaining Cautiously Optimistic In View Of Volatile Markets

China Aviation Oil Singapore Corp (CAO)’s 1Q18 earnings beat expectations with net profit jumping 13.9% y-o-y.
While there were lower trading and optimisation gains, an astounding 46% surge in contribution from SPIA more than offset the decrease. While there will be volatility, SPIA’s core profits should remain sustainable. We remain cautiously optimistic of CAO’s future, given its strong fundamentals.

Maintain BUY and target price of S$2.13, pegged at 13.5x 2018F PE, or a 20% discount to peer average of 16.9x.

China Aviation Oil Singapore Corp’s (CAO) 1Q18 earnings came in slightly above our expectations with net profit jumping 13.9% y-o-y. While gross profit dropped mainly due to lower profits from trading and optimisation activities, the 40.7% y-o-y increase in associate contributions more than made up for it.
The US$0.58m increase in expenses (mainly due to higher professional fees for business development and higher interest expenses from short-term bank borrowings drawdown for working capital purposes) was offset by a US$0.55m increase in other operating income (bank interest income less forex losses).

As usual, the key driver behind CAO’s associate contribution is its star SPIA associate. In 1Q18, associate contribution increased to US$21.0m from US$14.9m in 1Q17, powered mainly by a 46.0% y-o-y increase in SPIA’s profits. This profit increase was mainly attributable to higher forex gains and investment income.
We believe that increasing oil prices played its part in terms of inventory gain profits. Share of results for other associates (OKYC, Xinyuan, CNAF, HKR) also improved except for TSN-PEKCL.

While oil prices continue to trend upwards, the market remains extremely volatile with geopolitical factors such as the US pulling out of the Iran deal. We are cautiously optimistic for CAO in 2018 but continue to assume lower gains for trading and optimisation activities.
We expect the SPIA associate to continue to generate long-term growth rates around 7% g fundamentals and a China civil aviation boom.

While Shanghai’s importance as a global business hub will continue to translate to sustainable contributions from CAO’s SPIA associate, we do note that there will be volatility to its profitability as factors such as foreign currency and oil price movements play its part. While these contributions were positive in 1Q18, the reverse could easily be true.
Nonetheless, we do believe that the bulk of SPIA’s core contributions will continue to be sustainable as the Shanghai airport builds a new terminal (aiming to be amongst the world’s top three busiest airports in 2019) and as China experiences a civil aviation boom.

Maintain BUY and target price of S$2.13, based on 13.5x 2018F PE, pegged at a 20% discount to peers’ average PE of 16.9x.

A announcements on earnings-accretive fuel assets will also likely result in share rice reviews.

Edison Chen UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-10

SGX Stock Analyst Report BUY Maintain BUY 2.13 Down 2.260