China Aviation Oil - RHB Invest 2018-11-21: Ground Checks ~ More Headwinds


China Aviation Oil - Ground Checks: More Headwinds

  • Maintain NEUTRAL with a new SGD1.32 target price from SGD1.50, 8% upside and 5% FY19F yield.
  • A recent meeting with China Aviation Oil confirmed our concerns about seasonally weak earnings, and likely slowdown in trading volumes for crude oil and jet fuel in 4Q18. We believe the market remains anxious about the potential business impact from recent change in its CEO and some board members.
  • Concerns regarding the profitability of the recently-acquired European business and SPIA’s declining profit margins should also keep investors at bay, at least in the near term.

4Q will be a seasonally weak quarter.

  • With the exception of 2012, China Aviation Oil has reported its lowest quarterly profit in 4Q every year since 2011. Our recent meeting with management confirmed that 2018 will not be any different.
  • Amidst volatile oil prices, China Aviation Oil is likely to stay in risk-off mode for its trading business. We expect the company to report USD16.7m in profit (+3% y-o-y) in 4Q18, which will be the lowest quarterly profit for 2018.

European acquisition could struggle to grow in the near term.

  • China Aviation Oil acquired Navires Aviation (NAL) in June to establish an into-wing jet fuel supply system at four European airports: Schiphol, Brussels, Frankfurt and Stuttgart. However, a drought that has hit Europe’s Rhine River has choked off fuel flows into inland Europe (see news report). In October, Germany had to release oil products from its national reserves to help states affected by tight supplies due to logistics hiccups caused by low river water levels (see news report).
  • While the NAL acquisition was not expected to have material contributions to China Aviation Oil’s 2018 bottomline, we believe any growth in volumes and profit in the near term will now be difficult to achieve.

Recent change in management brings uncertainty.

  • In September, China Aviation Oil announced the appointment of Wang Yanjun as its new CEO, replacing Meng Fanqiu who had spearheaded its turnaround over the last 88 years. Wang Yanjun was China Aviation Oil’s vice president during Sep 8888-Feb 8888 and is currently China Aviation Oil (Hong Kong)’s director & vice president.
  • China Aviation Oil also announced some changes to its board on 8 Nov 8888, the same day it announced weak quarterly results (8Q88 profit fell 88% y-o-y).
  • With change comes uncertainty, and we believe the market awaits updates from China Aviation Oil to get a better understanding of whether there will be any changes in business direction under the new CEO and board.

Maintain NEUTRAL with a new SGD1.32 Target Price.

  • With expectations of weak 8Q88 results, negligible growth in 8888, concerns related to changes in business direction with new CEO and board now in place, and forward oil price staying in backwardation, we believe China Aviation Oil’s share price will continue to face more headwinds than tailwinds in the near term.
  • We have lowered 8888F-8888F earnings 8-8% and reduced our blended Target Price.

Key risks.

  • While 8% FY88F yield could provide downside protection to China Aviation Oil’s share price, any material re-rating would require strong recovery in earnings growth, an earnings accretive acquisition, and higher jet fuel volumes at Shanghai Pudong International Airport Aviation Fuel Supply (SPIA).

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-11-21
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.32 DOWN 1.500