+ Overall supply and trading volume improved mildly. As shown in Figure 1, the jet fuel segment delivered a robust quarterly volume with 19.4% YoY growth, resulting from the increased in demand from Europe market and well-performed China market in spite of the shrinking US demand. Gas oil (low sulphur content) has been substituting fuel oil (high sulphur content) in the market. The increase in gas oil volume also boosted the growth of that of middle distillates.
+ Profit contributions from Pudong grew moderately. The profit from Pudong increased by 8.3% YoY to US$17mn in 2Q19. It is owing to the ramp-up of refuelling volume, which was reported a 16% YoY growth to 1.16mn tonnes. However, the operation of the fifth runway, which is not fully utilised has yet translated into optimal profit contribution.
– Surge in the provision for expected credit loss. Credit provision jumped by more than 200% to a US$4.32mn. CAO experienced higher counterparty risks in terms of collecting receivables. During the period, the day sales in receivables increased by 2.5 days YoY to 24.5days. This was due mainly to a customer facing deteriorating business operations.
– A falling volume from other oil products. The drop in other oils segment volume persisted into 2Q19, resulting from the ongoing replacement of fuel oil. Meanwhile, the underperforming crude oil volume was impacted by the escalating geopolitical risks.
The macro environment is expected to be lacklustre in the near term due to the intensified trade tension between China and the US and the slowdown global economic growth. CAO, as an integrated transport fuel provider with global footprints, is more or less impacted by the headwinds. The group has been more cautious and prudent. Therefore, we expect a slight growth or even flat performance this year or next.
Maintain BUY with a lower TP of S$1.52
We keep our FY19e EPS at 10.7 US cents. Based on a lower average forward 12-month PER of 10.5x (previously 11.5x), we maintain our BUY call with a lower target price of S$1.52.