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.
- Against our expectation of USD16.7m PATMI highlighted in our report: China Aviation Oil - RHB Invest 2018-11-21: Ground Checks ~ More Headwinds, CHINA AVIATION OIL(S) CORP LTD (SGX:G92) reported 4Q18 PATMI of USD18.7m, aided by higher gross profit margin. This was partially offset by lower-than-estimated contribution from its key associates.
- Net margin also registered y-o-y and q-o-q improvement amidst lower interest costs and higher interest income.
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
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https://www.rhbinvest.com.sg/
2019-03-01
SGX Stock
Analyst Report
1.50
UP
1.320
