China Aviation Oil - DBS Research 2019-08-08: Stable Despite Uncertain Environment


China Aviation Oil - Stable Despite Uncertain Environment

  • Interim core earnings were largely in line with expectations, with net profit at US$55m (-2.5% y-o-y).
  • Provisions for expected credit loss were US$3m higher y-o-y and receivable days lengthened in a more challenging environment but remains well managed.
  • On track to meet our expectations.
  • Maintain BUY and S$1.85 Target Price.

Maintain BUY with Target Price of S$1.85, as we like CAO’s monopolistic aviation businesses.

  • CHINA AVIATION OIL (SGX:G92) continues to benefit from its 33% stake in the exclusive jet fuel refueller at Shanghai Pudong International Airport (SPIA). Its monopolistic position as the sole importer of bonded jet fuel in China allows it to grow alongside increasing travel demand there, while gaining traction globally.

Decent interim earnings in a more uncertain environment.

  • Given the slower global economic environment, China Aviation Oil did well to maintain its level of earnings in the first half of 2019 at US$55m, which was a marginal decline of 2.5% y-o-y. The company’s performance was well supported by continued steady demand for jet fuel in China, which helped to offset more challenging trading conditions.

Management ready to step up on its M&A efforts.

  • With a new management team on board that was seconded from parent CNAF, and a recent acquisition in Europe under its belt, China Aviation Oil is well poised to deliver on more value-accretive acquisitions to boost its long-term prospects, using its strong cash position.

Where we differ:

  • We have not factored in possible acquisitions in our forecasts and target price.

Potential Catalysts:

WHAT’S NEW - Stable earnings despite volatile environment

2Q19 revenue increased y-o-y to US$5.97bn despite decreased oil prices.

  • The fall in oil prices was bolstered by higher supply and trading volume from middle distillates at 5.72m tonnes for the quarter compared to 4.56m tonnes in 2Q18. Total trading volume increased from 9.97m tonnes in 2Q18 to 10.63 tonnes in 2Q19. Gross margin remains stable with gross profit recorded at US$17.1m.

Share of profits from associates increased marginally to US$19.2m, mainly due to higher profit contributions from SPIA.

  • The share of profits from SPIA continues to do well, increasing to US$16.98m for the quarter versus US$15.68m in 2Q18, while the share of profits from other associates decreased by US$0.75m y-o-y to US$2.18m for 2Q19. This is mainly due to lower contributions from OKYC as its earnings were affected by foreign exchange losses.
  • According to the management, KRW depreciated by 3.33% against the USD when compared to FY18.

Operating profit took a hit

  • Operating profit took a hit from the management’s prudent measure to record US$4.3m allowance for doubtful debts, a sharp increase when compared to US$1.4m in 2Q18. This was in response to a tighter credit environment. Accordingly, Accounts Receivables had increased to US$2.09bn as at 1H19 from US$1.27bn in the previous quarter.
  • We believe that the company will be able to manage this situation and we might see some writebacks in the second half of the year. Hence, we are maintaining our forecasts.

Paul YONG CFA DBS Group Research | 2019-08-08
SGX Stock Analyst Report BUY MAINTAIN BUY 1.850 SAME 1.850