China Aviation (Singapore) Oil – Encouraging for the start of the year April 21, 2017

PSR Recommendation: BUYStatus: MaintainedTarget Price: 2.00
  • 1Q17 shared profit from associates was marginally below our expectation. We will review our forecast in 2Q17.
  • 1Q17 net profit met 23.1% was within our expectation
  • We maintain our “Buy” rating with an unchanged TP of S$2.00 based on updated blended average forward PER of 7x, implying a 22.3% return from the last close price of S$1.635.

Results at a glance

1

High growth trading volume with improving margin

Total trading volume for middle distillates and other oil products in 1Q17 grew 24% and 123% respectively. During 1Q17, the average oil price (Brent) rose by 55% Y-o-Y to US$54.6/bbl.

In FY17, CAO aims to improve gross margin of the trading business. Figure 1 shows the comparison of quarterly gross profit and margin from 1Q11 to the current quarter. We can see the GP is not explicitly subject to the oil price level but the turning of the market. As mentioned in our previous report, contango is favourable for trading business. We think oil market will continue to recover. 1Q17 GP of US$15.5mn was the second highest since 1Q11 and GPM of 0.47% is above average GPM of 0.36% over the past 5 years. Moving forward, we expect the management to deliver on its optimisation of trading efficiency.

Figure 1. Quarterly gross profit and margin

2

Source: Company, PSR

Propellant from SPIA’s contribution made 1Q shared profits top in recent years

Referring to Figure 2, 1Q17 shared profits from associates was reported at US$14.9mn, surpassing last year’s high by US$0.7mn. The 5.1% Y-o-Y mild growth was mainly attributed to 7.1% growth in profit contribution from SPIA, offsetting by the declined profits from other associates as well as continued losses from CNAF HKR. Looking forward, we still think investments in associates in FY17 can possibly outperform last year. Shanghai, the financial hub in China, is expected to embrace ongoing favourable policies to further enhance international business and communication development, especially for the free trade zone, whereby passenger traffics by air continue to escalate this year.

Figure 2. Quarterly shared profit comparison

3

Source: Company, PSR

Opportunities and challenges co-exit

We worry the rising geopolitical and economic uncertainties could impact the global air traffic. Regional tensions between countries will inevitably suffocate tourism. For instance, the recent deployment of THADD system in South Korea resulted in the protest against it in China, and the number of Chinese tourists dropped substantially in South Korea. Moreover, oil price and FX volatility could also negatively impact on CAO’s financial results.

However, CAO currently hoards US$276.1mn in cash which enables the group to capture any M&A opportunities to fulfil its strategy of value chain integration and expanding infrastructure globally.

Valuation

Based on our unchanged FY17e EPS of 12.7 US cents (17.1 SG cents) and the blended average forward PER of 11.7x, we maintain our “Buy” call with an unchanged target price of SG$2.00.

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Chen Guangzhi
Investment Analyst
Phillip Securities Research Pte Ltd

Guangzhi graduated from Singapore Management University with a Master degree in Applied Finance and from South China University of Technology with a Bachelor degree in Electronic Commerce.

The current sector coverages include Energy, Utilities, and Mining sectors. He has 3 years experience in equity research in both Hong Kong and Singapore market. He is the mandarin spokesperson for Phillip Securities Research in relation to China-related projects and all mandarin seminars and client events.

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