China Aviation Oil - RHB Invest 2019-07-17: Expect A Weak 2Q19; Outlook Remains Strong

CHINA AVIATION OIL(S) CORP LTD (SGX:G92)

China Aviation Oil - Expect A Weak 2Q19; Outlook Remains Strong

BUY, SGD1.60 Target Price, 19% upside and 3% FY19F yield.
Amidst a high base effect from exceptionally strong 2Q18 earnings and likely weak jet fuel and gasoil trading businesses, China Aviation Oil (SGX:G92) should see some weakness in 2Q19 earnings.
Nonetheless, we maintain our investment thesis and remain confident of its long-term growth, which will be driven by continuing growth in Chinese aviation traffic and airport capacity expansion, especially at Shanghai Pudong International Airport (SPA).

Rising shale oil production, despite OPEC’s decision to extend oil production by nine months, prompted our regional oil and gas analyst to lower our Brent crude oil price estimates by USD1.5/barrel to USD68.5/barrel each for 2019-2020. While this lowers China Aviation Oil’s revenue by 1-2%, net profit estimates remain largely unchanged as we had not factored in the material increase in margins for its jet fuel and gasoil trading businesses.

China Aviation Oil will announce its 2Q19 earnings on 7 Aug.
We estimate 2Q19 revenue at USD5.4bn (-6% y-o-y) and a recurring net profit of USD28m (-5% y-o-y). 2Q18 earnings were characterised by strong growth in trading volume of other oil products and above-average margins for its trading business. We do not expect this scenario to be repeated in 2Q19, as the forward curve for oil prices was in backwardation during 2Q19.

We remain in China’s traffic over 2019-2021. To account to the negative war, we are forecasting only mid-jet for the fuel of last 10 years.
The completion of capacity expansion at SPA by end-2019 should also enable Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA, which is 33%-owned by China Aviation Oil) to see higher jet fuel volume growth in 2020-2021.

With a large net, China Aviation Oil could undertake a large approvals, in case it is unable to.
China Aviation Oil’s stock trades at a compelling ex-cash FY20 P/E of 4.6x. This compares with an estimated FY20 earnings growth of 7.6%.
Key downside risks are lower-than-estimated jet fuel volume growth and opening up of the Chinese aviation fuel supply market, which would put an end to China Aviation Oil's current monopoly.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-07-17

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