China Aviation (Singapore) Oil: Margin improvement from underlying business August 3, 2018

  • 2Q18 net profit exceeded our expectations due to higher than expected gross profit.
  • Total volumes grew together with margin improvement.
  • More modest growth in profits from associates due to Pudong’s underperformance.
  • The acquisition of Navires Aviation Limited is expected to generate synergies.
  • We raise our FY18e EPS by 6% to 11.6 US cents due to the improvement in profit margins and a profit contribution from the recent acquisition. Based on an average forward 12-month PER of 12.8x, we maintain our BUY call with an unchanged target price of S$2.00 for FY18.

Positives

+ Total volumes grow amid margin improvement: Total supply and trading volumes continued to grow. Other oil products volumes surged due to higher crude oil import quotas into China in 2Q18. However, the volume of middle distillates, especially jet fuel fell substantially. Backwardation in oil markets had persisted, and CAO had to reduce their paper trading volume. Supply and trading margins, measured by gross profit/tonne, increased to US$1.64/tonne (+30.5% YoY) in 2Q18.  

Negatives

– A slight drop in profits from associates due to Pudong’s underperformance: Profit from Pudong was US$15.7mn (-2.6% YoY) due to foreign exchange losses and higher operating expenses offsetting the increase in refuelling volume. During 2Q18, refuelling volume arrived at 1.2mn tonnes (1H18: 2.3mn tonnes, FY17 4.4mn tonnes) while RMB depreciated against USD by 7% YoY.  OKYC continued to deliver strong growth from the tank storage leasing businesses with a profit of US$2.0mn (+40.2% YoY). Net losses from CNAF HKR reduced to a new low of US$0.14mn since the business was acquired in 2014.

Outlook

Trading activities are expected to be slower due to the stubbornly long backwardation environment in oil markets.  In 2Q18, CAO extended the global footprint in Europe throughout the acquisition of Navires Aviation Limited (NAL). We are hopeful NAL is able to contribute profits to the group. Other synergies will come from flexibility in managing and coordinating jet fuel supply globally. We are still upbeat on the outlook since demand for jet fuel and other oil product remain healthy.

Furthermore, the 5th runway at Pudong airport is partially utilized. Therefore, there is still ample room to grow air traffic volume in the foreseeable future, which will translate into more refuelling volume and higher profit contribution. 

Maintain BUY with an unchanged TP of S$2.00

We adjust our FY18e EPS upward to 11.6 US cents (previously 10.9 US cents) due to the improvement in profit margins and a profit contribution from the recent acquisition. Based on an average forward 12-month PER of 12.8x, we maintain our BUY call with an unchanged target price of S$2.00.

Navires Aviation Limited (NAL)

NAL is a private company limited by shares registered in England and Wales with principal activities in jet fuel supply and trading as well as aviation marketing. NAL has an interest in Aviation Fuel Supply B.V., a company incorporated in the Netherlands and holds concession rights to supply jet fuel at the Schiphol Airport. Through the acquisition of NAL, CAO will be able to establish into-wing jet fuel supply system at four European airports namely, Schiphol Airport, Brussels Airport, Frankfurt Airport and Stuttgart Airport.

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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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