China Aviation Oil - RHB Invest 2019-03-01: Slowdown In Earnings Growth; Keep NEUTRAL

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

China Aviation Oil - Slowdown In Earnings Growth; Keep NEUTRAL

  • Maintain NEUTRAL with SGD1.50 Target Price from SGD1.32 as we roll over our blended valuation to 2019, offering 9% upside and 4% FY19F yield.
  • China Aviation Oil reported 2018 PATMI of USD94m (+10% y-o-y), slightly ahead of our and consensus estimates, amidst better-than-expected GP margin. Despite the recent run-up in China Aviation Oil’s share price, its forward valuation seems cheap on an ex-cash basis. Its net cash balance of USD358m accounts for 40% of its market cap.
  • However, an expectation of meagre 2.5% earnings growth in 2019; concerns relating to forward oil price staying in backwardation; as well as slowdown in volume growth at SPIA – which accounts for 65% of its PBT – could keep China Aviation Oil’s share price in check in the near term.



4Q18 results announced on 28 Feb were ahead of our estimates.



Earnings drivers.

  • Growth in volume for supply of jet fuel into China (a cost plus business); higher profit contribution from Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), a 33% owned associate; and small but maiden full year contribution from recently acquired European business should support 2.5% profit growth in 2019F.
  • We raise our 2019- 2020 profit estimates by 3% and introduce 2021 estimates.


New management has identified its focus areas.

  • Our discussion with China Aviation Oil seems to suggest that the new management team has aligned its focus on achieving profitability over registering volume growth, and growing external business – ie reducing dependence on its sister concerns to support an increase in jet fuel supply and trading volumes.


Key upside risks.

  • China Aviation Oil’s share price has delivered 29% returns in 2019, outperforming the STI by 25%. This sharp recovery in share price has brought the stock’s forward P/BV, P/E and dividend yield close to its 3-year average values.
  • We believe that further re-rating would require a stronger recovery in earnings aided by higher jet fuel supply volumes at SPIA and better-than-estimated margins for its core jet fuel supply and trading business.





Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-03-01
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.50 UP 1.320



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