+ Supply and trading margin improved: Supply and trading margins, measured by gross profit/tonne, increased to US$1.06/tonne in 3Q18 (3Q17: US$0.32/tonne).
– Supply and trading volume dipped: Total supply and trading volumes decreased in 3Q18, mainly attributable to the fall in volumes of other oil products. However, volume for middle distillates remained flat. The drop in jet fuel volume was offset by the increase in the volume of gas oil. Backwardation in oil markets had persisted. Hence, CAO continued to reduce paper trading volume.
Figure 1: Drop in overall trading volumes
– A moderate drop in profits from associates due to Pudong’s underperformance: 3Q18 profit from Pudong was US$16.5mn (-12.6% YoY) due to foreign exchange losses and higher operating expenses offsetting the increase in refuelling volume. During 3Q18, refuelling volume arrived at 1.1mn tonnes (9M18: 3.4mn tonnes, 9M17: 3.2mn tonnes) while RMB depreciated against USD by 2.4% YoY. However, CAO started to hedge FX, mainly USD against RMB, since 2Q18. Profit from OKYC nosedived in 3Q18 to only US$260k (3Q17: US$1.8mn) due mainly to the decrease in leasing fees and utilisation of oil tanks.
Global trading risks are expected to persist in the near term. The decrease of supply and trading volume is partially impacted by the trade war. Management is reviewing the crude oil supply business because of the substantial decline of US jet fuel demand from the domestic teapot refineries in China. The 9M18 crude oil supply volume to reached 7.1mn tonnes (9M17: 5.1mn tonnes). Given this, we believe the supply and trading volume will decrease moving forward. On the other hand, rising FX risk due to the devaluation of RMB is also a headwind for the business.
Maintain BUY with a lower TP of S$1.76
We adjust our FY18e EPS downward to 11.2 US cents (previously 11.6 US cents) due to the decrease in supply and trading volume, as well as profit from Pudong. Based on an average forward 12-month PER of 11.5x (previously 12.8x), we maintain our BUY call with a lower target price of S$1.76.