China Aviation Oil Singapore Corp - UOB Kay Hian 2018-11-02: 3Q18 Buffeted By Higher Expenses And Weaker Associates Performances

CHINA AVIATION OIL(S) CORP LTD (SGX:G92) | SGinvestors.io CHINA AVIATION OIL(S) CORP LTD (SGX:G92)

China Aviation Oil Singapore Corp - 3Q18: Buffeted By Higher Expenses And Weaker Associates Performances

  • China Aviation Oil (CAO)’s 3Q18 earnings were a miss as profits fell due to the weaker performances of its associates and higher expenses.
  • While revenue grew 21.24% y-o-y, the strong top-line performance was offset by lower associate contribution (-18.67% y-o-y), higher other operating expenses (+231.08% y-o-y) and higher financing costs (+465.0 y-o-y).
  • We lower our 2018 forecast but maintain BUY with a lower PE-based target price of S$1.93 pegged at 13.5x 2018F PE, or a 20% discount to peer average of 16.9x.


3Q18 RESULTS


3Q18 performance was a miss.

  • China Aviation Oil Singapore Corp’s (CAO) 3Q18 earnings missed our expectations with net profit slipping 8.0% y-o-y. Revenue leapt 21.2%% y-o-y to US$6.3b, driven by higher oil prices.
  • Gross profit surged 155.7% y-o-y, mainly attributable to higher profits from trading and optimisation activities as well as higher jet fuel volume supplied to China. Sequentially, gross profit slipped 32.36% from 2Q18 due to lower profits from trading and optimisation activities.

Other operating expenses and financing costs ran ahead of estimates.

  • China Aviation Oil made an impairment provision of US$1.6m on receivables, which drove other operating expenses up by 231.1% y-o-y. The provisions were made according to the adoption of the new SFRS(I) 9 which came into effect 1 Jan 18.
  • Financing costs rose 465.0% y-o-y as a result of higher trading activities.

Associate contribution declined.


  • In 3Q18, associate contribution declined 18.7% y-o-y, as weakness in Shanghai Pudong International Airport Aviation Fuel Supply Company Ltd (SPIA) was compounded by weaker performance from Oilhub Korea Yeosu Co Ltd (OKYC).
  • Share of profits from SPIA decreased 12.6% y-o-y and was attributable to forex loss and higher operating expenses despite an increase in refuelling volume.
  • Share of profits from other associates decreased 62.0% y-o-y mainly due to lower contribution from OKYC, as leasing fees from its tank storage leasing activities declined.


STOCK IMPACT


SPIA will continue to contribute.

  • Shanghai’s importance as a global business hub will translate to sustained contributions from CAO’s associate, SPIA. We note that anticipated demand fuelled by China’s civil aviation boom has resulted in the addition of a new terminal due in 8888.
  • We expect SPIA’s sales in renminbi terms to grow in tandem with the Shanghai Airport as it aims to be the top three busiest airports in the world.


EARNINGS REVISION/RISK

  • We adjust our 8888-88 net profit forecasts to US$88.8m (-8.8%), US$888.8m (-8.8%) and US$888.8m (-8.8%) respectively. We have factored in higher other operating expenses and finance costs.
  • Risks include sustained devaluation of the renminbi and volatility in oil prices resulting in lower contributions from SPIA.


VALUATION/RECOMMENDATION

  • Maintain BUY with a lowered target price of S$8.88, based on 88.8x 8888F PE, pegged at 88% discount to peers’ average.


SHARE PRICE CATALYST

  • Higher-than-expected oil trading volumes.
  • Better-than-anticipated performance by associates.
  • Acquisition of earnings-accretive fuel assets.





Yeo Hai Wei UOB Kay Hian Research | Andrew Chow CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-11-02
SGX Stock Analyst Report BUY MAINTAIN BUY 1.93 DOWN 2.050



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