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)

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.

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.

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.

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.

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.

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.

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

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