China Aviation Oil - RHB Invest 2018-08-06: Moderating Growth Expectations

CHINA AVIATION OIL(S) CORP LTD SGX:G92

China Aviation Oil - Moderating Growth Expectations

Maintain BUY with lower SGD1.75 Target Price, from SGD1.80, 13% upside as China Aviation Oil remains on track for a return to earnings growth in 2018 after witnessing a decline in 2017.
Post the analyst briefing for the 2Q18 results, we remain positive about growth but lower our 2018-2020 earnings by 2%-8% to account for slower profit growth from trading business as forward oil price remains in backwardation.
We maintain that growth will continue to be driven by higher jet fuel supply volume to Chinese aviation market, higher jet fuel and gasoil trading profit and increase in profit contribution from associates.

Volumes for supply and trading of jet fuel declined 15% y-o-y in 2Q18 to 3.4m tonnes. However, based on our discussion with China Aviation Oil, we understand that the business of jet fuel supply into Chinese aviation traffic, which operates on a cost-plus model, registered mid-teens growth in volume for 2Q18.
With growing aviation traffic, China Aviation Oil remains confident of reporting high single digit growth in supply of jet fuel to Chinese international aviation traffic in the long-term.

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Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), a 33%-owned associate of China Aviation Oil that offers aircraft refuelling services at Shanghai Airport, had a weak 2Q18, where profit declined 2.6%.
China Aviation Oil noted that weakness was largely due to FX changes and rise in inventory holding costs amidst higher jet fuel volumes and rise in fuel price. However, with commencement of operations Shanghai airport’s fifth runway, SPIA should see a gradual rise in volumes and profit.

Recent strong growth in trading of “other oil products” was driven by increase in trading volume for crude oil. China Aviation Oil stated that growth in volume was driven by orders from its customers in China, who had high demand for crude oil despite the forward oil price being in backwardation.
China Aviation Oil also noted that while demand for 2H18 is expected to remain strong it may not mirror the strong volume growth seen in 1H18.

We lower our 2018-2020 earnings by 2%-8% to account for slower profit growth from trading business as forward oil price remains in backwardation. We estimate that overseas (non-Chinese) jet fuel trading business has witnessed volume decline for two consecutive quarters.
While there are expectations of some increase in volume with the recent purchase of European business, we would like to highlight that the fourth quarter has historically been the weakest quarter for China Aviation Oil during 2014-2017.

Our Target Price, which continues to be derived as an average of forward P/E, P/BV, EV/adjusted EBITDA and DCF of adjusted free cash flows, is now based on earnings estimates for rolling four quarters instead of 2018 estimates.
Our Target Price of SGD1.75 implies a 11.4x 2018F P/E.
We expect EPS to grow by 12.5% y-o-y in 2018, implying a 2018F PEG of less than 1x – which we deem as fair.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-06

SGX Stock Analyst Report BUY Maintain BUY 1.75 Down 1.800