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


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).

A weaker-than-expected 1H20; growth expected only in FY21F

  • 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.

Writ of summons a surprise negative, but cash pile helps

  • 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

Reiterate HOLD; uncertainties abound

Upside and downside risks to our call

  • 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