China Aviation Oil Singapore Corporation - UOB Kay Hian 2019-04-29: 1Q19 Earnings Dipped Amid Low Oil Prices

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

China Aviation Oil Singapore Corporation - 1Q19: Earnings Dipped Amid Low Oil Prices

  • China Aviation Oil’s 1Q19 net profit slipped 2.12% y-o-y to US$26.3m. While other operating income leapt 73.6% y-o-y, it was not enough to offset lower profits from trading and optimisation activities and weak share of profits from SPIA.
  • We maintain our neutral stance on China Aviation Oil as we await a turnaround in the operating environment.
  • Reiterate HOLD with a PE-based target price of S$1.25, pegged at 8.4x 2019F PE. Entry price: S$1.10.



CAO's 1Q19 RESULTS


Soft 1Q19.

  • CHINA AVIATION OIL SINGAPORE CORPORATED LTD (SGX:G92)’s 1Q19 net profit is in line with our expectation, dipping 2.12% y-o-y to US$26.3m.
  • Revenue declined 9.37% y-o-y to US$3.7b as trading volume for fuel oil fell. Gross profit decreased 12.04% due to lower profits from trading and optimisation activities. Profit before tax was propped up by an increase in other operating income (+73.64% y-o-y) and lower operating expenses (- 20.39% y-o-y).

Share of profits from associates slid 8.79% yoy to US$19.1m.

  • In 1Q19, associates’ contribution declined 8.79% y-o-y, mainly attributable to weaknesses in Shanghai Pudong International Airport Aviation Fuel Supply Company Ltd (SPIA) and Oilhub Korea Yeosu Co., Ltd (OKYC). Share of profits from SPIA declined to US$17.2m (-8.91% y-o-y) due to lower revenue as average oil prices in 1Q19 were lower from a year ago.
  • Share of other associates decreased to US$1.91m (-7.68% y-o-y) as OKYC posted lower profits from its tank storage leasing activities.


STOCK IMPACT


Weaker renminbi spells tougher operating environment.

  • Shanghai’s importance as a global business hub will translate into sustained contributions from SPIA, but we note the renminbi weakness will likely take the shine off SPIA’s contribution to China Aviation Oil’s bottom line.

Cash hoard may translate into war chest for M&A.

  • The strong earnings performance resulted in a cash balance that rose by US$21.5m, or 6.02% over the balance as at 31 Dec 18. China Aviation Oil is in a net cash position with no borrowings while net cash to equity ratio is at 47.47% or 43.21% of market capitalisation.
  • While we understand that the bulk of China Aviation Oil’s cash is reserved for working capital uses, it still has sufficient arsenal to participate in acquisitions. China Aviation Oil remains open to M&A opportunities to build up its international business.


EARNINGS REVISION/RISK

  • No revision to earnings forecasts.
  • Risks include sustained devaluation of the renminbi and volatility in oil prices resulting in lower contributions from SPIA.


VALUATION/RECOMMENDATION

  • Maintain HOLD with a target price of S$1.25, based on 8.4x 2019F PE, pegged at a 20% discount to peers’ average.


SHARE PRICE CATALYST

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





Yeo Hai Wei UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-04-29
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.250 SAME 1.250



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