China Aviation Oil - CGS-CIMB Research 2020-08-20: Still Not The Time To Fly

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

China Aviation Oil - Still Not The Time To Fly

1H20 results were weak as China Aviation Oil’s gem SPIA saw its contributions plunge 93.8% y-o-y. Borders are slowly opening but 2H20 will likely still be muted.
The writ of summons was a negative surprise but we think China Aviation Oil’s end-1H20 cash pile of US$406.7m will help it to mitigate any payments, if any.

With lockdowns easing, we lift our CY21F P/E to 8.5x (from 6.5x), close to China Aviation Oil’s -0.5x s.d. Target Price is lifted slightly to S$0.87 (FY20-22F EPS lowered).

China Aviation Oil (SGX:G92)'s 1H20 revenue fell 44.5% y-o-y but better margins from China Aviation Oil’s trading optimisation activities helped to alleviate the shrinkage in gross profit to only a 20.3% y-o-y drop. However, an 89.9% y-o-y decline in associate earnings to US$3.9m (from 1H19: US$38.3m), largely due to a 93.8% y-o-y fall in Shanghai Pudong International Airport Aviation Fuel Supply (SPIA) associate contributions to US$2.1m, dragged China Aviation Oil’s 1H20 net profit down by 57% y-o-y.
1H20 net profit was below our expectations, accounting for 38% of our full-year forecast.
China appears to be slowly opening its borders (in Aug, it resumed visa applications from certain European countries); however, we think a full recovery in international travel would only happen in FY21F, at best.
We cut our China Aviation Oil's FY20- 22F EPS by 20.3-22.2% as we lower our associate contributions from SPIA by 66.9%/ 34%/33.8% in FY20F/21F/22F.

China Aviation Oil announced it was served a writ of summons by Banque De Commerce Et De Placements SA, DIFC Branch on 28 July, which alleged China Aviation Oil was involved in fraudulent representations in a cargo deal transaction with Zenrock Commodities Trading Pte Ltd.
China Aviation Oil did not reveal the amount claimed, but according to news reports, there could be claims of at least US$19m.
China Aviation Oil said it has been advised that there are good legal grounds to successfully defend the claims.
While the news was a negative surprise, we note that China Aviation Oil ended 1H20 with a cash pile of US$406m, which would be able to stomach any settlements, if any. We await further developments on this matter

We lift our valuation basis to 8.5x CY21F EPS (from 6.5x), close to China Aviation Oil’s -0.5x s.d. to long-term average of 9.4x, as we no longer think that it should trade at the -1 s.d. levels (of 6.5x) as many economies are slowly easing out of their lockdowns. However, we have still priced in a discount as earnings recovery could be slow and uneven.
The current writ of summons also puts a negative bias on near-term sentiment.
Post our earnings cut and new P/E basis, our target price for China Aviation Oil is slightly raised to S$0.87.
See China Aviation Oil Share Price; China Aviation Oil Target Price; China Aviation Oil Analyst Reports; China Aviation Oil Dividend History; China Aviation Oil Announcements; China Aviation Oil Latest News.

Upside risks include a swifter recovery in China’s international travel, faster recovery in global travel and less uncertainty in the oil markets (which could translate to higher earnings.
Downside risks include a prolonged COVID-19 impact and lower dividends.

Cezzane SEE CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-20

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.87 UP 0.860