China Aviation Oil - CGS-CIMB Research 2018-11-01: 3Q18 In-line, Taking Some Heat Off Forward Growth


China Aviation Oil - 3Q18: In-line, Taking Some Heat Off Forward Growth

  • China Aviation Oil (CAO)'s 9M18 net profit of US$75.1m was in line forming 81.3%/78% of our/Bloomberg consensus’ (S$92.4m/S$96.6m) FY18F forecasts.
  • CAO’s GP held up with a 9M18 growth of 33.9% on better margins; mitigating the flattish growth of its associates (9M18 growth of 4.3%).
  • We cut FY19- 20F EPS amid an uneven operating environment. Maintain ADD with a lower Target Price, now 12.0x FY19F P/E, a c.30% discount to peer average.

Gross profit rises on better margins of the other oil products

  • China Aviation Oil (CAO)'s 3Q18 Gross Profit of US$11.1m was higher y-o-y on better margins as 3Q17 was impacted by some one-offs supply issues, and despite 3Q18 middle distillate volumes declining 1.5% y-o-y on lower trading and optimisation activities and other oil products being down 35.3% y-o-y.
  • Overall 9M18 Gross Profit of S$40.7m (+33.9% y-o-y) was mainly driven by margins earned from other oil product volumes, especially in 2Q18.

Associate performance softens on weaker SPIA and OKYC

  • 3Q18 associate earnings of US$17.5m was lower y-o-y (-18.7%) and q-o-q (-6.0%) on weaker Shanghai Pudong International Airport Aviation Fuel Supply (SPIA) and Oilhub Korea Yeosu Co (OKYC) contributions. SPIA’s 3Q18 associate earnings fell 12.6% y-o-y to US$16.5m due to foreign exchange losses (the Rmb depreciated c.5.5% vs. US$ in 9M18) and higher operating expenses despite refueling volumes increasing. OKYC was tanked by lower leasing fees as storage leasing activities declined with the market backwardation.
  • Overall, 9M18 associate earnings increased by only 4.3% y-o-y.

Balance sheet stays healthy – a plus point

  • As at end-3Q18, China Aviation Oil (CAO) had a net cash position of 27.7UScts/share (US$240m), giving it ample balance sheet headroom to participate in acquisitions, in our view.
  • CAO had previously mentioned that it is always open to M&A opportunities to expand its global jet supply and trading network, complemented with trading in other products.

Taking some heat off growth

  • We opt to be slightly cautious on forward growth prospects as the crude oil markets are still in backwardation mode (which will impact CAO’s trading volumes and OKYC’s leasing activities) and the potential that SPIA could still be affected by a depreciating Rmb vs. US$.
  • We lower our FY88F/88F EPS forecasts by 8.88%/88.8% respectively.

Maintain ADD with a lower Target Price of S$1.83

  • We still see China Aviation Oil (CAO) as a longer-term proxy for China’s growing outbound travel and like its healthy balance sheet.
  • Maintain ADD, but with a lower Target Price now based on 88.8x FY88F P/E (vs.88.8x) as we widen our discount to c.88% (vs. 88%) of peer average.
  • Catalysts are higher product volumes and associate earnings.
  • Downside risks include lower volumes, margins and associate earnings.

Cezzane SEE CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-01
SGX Stock Analyst Report ADD MAINTAIN ADD 1.83 DOWN 2.030