• FY17 profit from associates was in line with our full year expectation.
• FY17 net profit missed our full year expectation by 6.6% due to higher than expected tax expenses.
• Trading volumes continue to grow, and profits from associates touched a new high.
• The 5^th runway and satellite terminal in SPIA will drive up air traffic in this and next year.
• We revise down our FY18e EPS to 11 US cents (previous 12.5 US cents). Based on a higher average forward 12-month PER of 13.3x (previous 11.5x), we maintain our BUY call with an unchanged target price of S$2.00 for FY18.

Positives

+ The scale of trading business keeps improving:

It is worth noting that the fastest growth in trading volume in other oil products came from fuel oil and crude oil in FY17.

+ Profits from associates delivered a moderate growth: Profit from Pudong arrived at US$64.2mn (+5.8% YoY) owing to a 9.8% YoY growth in refuelling volume in FY17 (4.5mn tonnes). Total profits from associates recorded a new high to US$71.5mn (7.8% YoY growth) since other associates except CNAF HKR generated double-digit growth of profits. Thought CNAF HKR is still loss-making, the amount of loss decreased by12.5% YoY to US$0.8mn.

Negatives

– Unexpected higher tax expenses in FY17: The tax expenses in FY17 increased by 133.2% YoY to US$6.9mn. It was due to an expansion of the global trading business that is subject to the higher tax rate and the restructuring of OKYC that incurred one-off tax expenses (US$0.5mn) and provision. Moving forward, the effective tax rate will be higher in the future with the global footprint continuous to enlarge, comparing to the past when CAO mainly relies on an income stream from China.

Outlook

In 2017, the respective air traffic and passenger traffic reached 497k (Up 3.5% YoY) and 70mn (Up 6.1% YoY) in SPIA. We expect to see higher growths of the two traffic volumes this year, attributable to the commencement of the 5^th runway. In 2019, the new satellite terminal will provide another 89 to 125 slots when it commerce operations. Hence, we expect Pudong deliver strong earnings growth for CAO in the upcoming years. As of Dec-17, CAO held US$300mn cash, and management will continue to explore the market and to leverage the fund to incorporate quality assets into the portfolio. 

Maintain BUY with unchanged TP of S$2.00

We revise down our FY18e EPS to 11 US cents (previous 12.5 US cents), due to the expectation of higher tax rate and full operation of the 5^th runway will come into effect later than expected. Based on a higher average forward 12-month PER of 13.3x (previous 11.5x), we maintain our BUY call with an unchanged target price of S$2.00 for FY18.