China Aviation Oil Singapore Corp - UOB Kay Hian 2019-03-01: 4Q18 Results In Line, Solid Performance Rounds Off The Year; Downgrade To HOLD

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

China Aviation Oil Singapore Corp - 4Q18: Results In Line, Solid Performance Rounds Off The Year; Downgrade To HOLD

  • China Aviation Oil reported 4Q18 net profit of US$18.7m (+23.9% y-o-y). Full-year net profit of US$93.9m (+10.5% y-o-y) came in 3.1% above our expectations. 4Q18 revenue grew 7.8% y-o-y to US$4.4b which flowed into gross profit.
  • With volatile oil prices and a weakening renminbi against the US$, we expect significant challenges in China Aviation Oil’s operating environment, hence we lower our 2019-20 earnings forecasts.
  • Downgrade to HOLD with a lower PE-based target price of S$1.25, pegged at 8.4x 2019F PE.



4Q18 RESULTS


Solid 4Q18 performance.

  • CHINA AVIATION OIL(S) CORP LTD (SGX:G92)’s 4Q18 net profit was in line with our expectations, leaping 23.9% y-o-y to US$18.7m.
  • Revenue increased 7.8% y-o-y to US$4.4b, driven by higher oil prices. Gross profit climbed 11.9% y-o-y, mainly attributed to higher profits from trading and optimisation activities as well as higher jet fuel volume supplied to China.

Other operating expenses turned positive on write-back of allowances.

  • Other operating expenses turned positive to US$3.9m, mainly due to write-back of allowances to doubtful debt of US$4.2m.

Associates contributions declined.

  • In 4Q18, associates’ contribution declined 10.6% y-o-y, as weakness in SPIA dragged down stronger performances of other associates. Share of profits from SPIA decreased 13.1% y-o-y due to forex losses of US$8.6m.
  • Share of profits from other associates rose 64.4% y-o-y, mainly due to higher profits from OKYC’s tank storage leasing activities.


STOCK IMPACT


Weaker renminbi and volatile oil prices spell a tougher operating environment.

  • While Shanghai’s importance as a global business hub will translate into sustained contributions from SPIA, we note the renminbi weakness will likely take the shine off SPIA’s contribution to China Aviation Oil’s bottom line.
  • In addition, volatility in oil prices will introduce challenges to China Aviation Oil’s ability to sustain profitability at its trading business.


EARNINGS REVISION/RISK


Reduce 2019-20 net profits and roll earnings forecast to 2021.

  • We reduce our 2019- 20 net profit forecasts to US$94.4m (-7.1%) and US$97.2m (-12.6%) respectively. We factor in lower revenue as a result of weaker trading revenue and lower share of profits from SPIA on a weaker renminbi.
  • Risks include sustained devaluation of the renminbi and volatility in oil prices resulting in lower contributions from SPIA.


VALUATION/RECOMMENDATION

  • Downgrade to HOLD with a lower target price of S$1.25, based on 8.4x 2019F PE, pegged at a 20% discount to peers’ average.
  • With volatile oil prices and a weakening renminbi against the US$, we expect significant challenges in China Aviation Oil’s operating environment. Entry price: S$1.10.


SHARE PRICE CATALYST

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





Yeo Hai Wei UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-03-01
SGX Stock Analyst Report HOLD DOWNGRADE BUY 1.25 DOWN 1.930



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