SINGAPORE (Mar 1): UOB Kay Hian and CIMB are maintaining China Aviation Oil Singapore at "buy" on brighter outlook with earnings from associates fuelling FY18 growth.
FY17 core net profit of US$85.9 million ($113.9 million) which came in within expectations at 96.9% of Bloomberg consensus estimates. This was despite higher tax expenses for the year, largely due to one-off tax expenses and recognition of deferred tax liabilities.
See: China Aviation Oil reports 21.7% fall in 4Q earnings to $18.5 mil on higher oil prices
UOB analyst Edison Chen says China Aviation Oil's 4Q17 results was a mixed bag. While associate contributions rose 26.2% to US$16.8 million, lower trading and optimisation gains, higher expenses and greater tax exposure more than offset the gains.
"We remain cautiously optimistic for China Aviation Oil's future given the strong fundamentals. Reduce both 2018 and 2019 estimates by 8.0%," says Chen who is keeping his "buy" with a lower target price of $2.13 based on 13.5 times FY18 earnings.
For CIMB, FY17 core net profit came in 3.4% lower y-o-y though within expectation analyst but Cezzane See notes the steady 7.8% y-o-y growth in associate earnings to $71.5 million which cushioned the effect of the lower gross profit and higher tax expenses.
The key driver behind China Aviation Oil's 26.2% y-o-y jump in associate contributions is its star SPIA associate, which grew 19.7% y-o-y to US$16.3 million in 4Q17 from US$13.6 million as a result of higher refuelling volume and higher oil prices.
"We understand that the SPIA started trial runs on its fifth runway at Shanghai Pudong at the end 2017," says See who adds this could bump up refuelling volumes for SPIA, the airport's sole jet fuel refueller, in FY18. FY19 volumes could grow further with the completion of the airport's satellite terminal which would boost its passenger capacity "up to 80 million".
The Edge Singapore reported on Wednesday night China Aviation Oil was seeking synergistic M&A opportunities to expand its global jet supply and trading network, complemented with trading in other products.
See: China Aviation Oil eyes acquisitions as 2018 priority
"We were heartened to hear this as it could enhance its market presence given it is largely known as China-centric," adds See. As at end 2017, China Aviation Oil had a net cash position of US 21 cents/share, giving it ample balance sheet headroom to participate in acquisitions.
In contrast, RHB is maintaining its "neutral" call on China Aviation Oil as its results "continue to disappoint", reporting lower-than-expected FY17 results with 4Q17 gross and net profit declining for a second straight quarter.
Analyst Shekhar Jaiswal says a higher tax rate, along with volume decline and lower gains in the trading business, were to blame for the weak 4Q results.
China Aviation Oil’s 4Q17 gross profit fell 21% y-o-y to US$8.3 million, amid lower volume and weaker gains for the trading business. The group also reported higher tax expense in 4Q17 amid an increase in deferred tax liabilities and decline in deferred tax assets.
China Aviation Oil is guiding for tax expense to remain elevated during the forecast period, as a greater proportion of profit is expected to be generated from non-Singapore operations where tax rates are higher.
Meanwhile, 4Q17 volume for the trading business fell 9% y-o-y to 3.1 million tonnes and revenue declined 35% y-o-y to US$684 million. For FY17, volume and revenue for trading business were up 25% and 38%, respectively. "We expect volumes to grow at a slower pace of 20% in FY18," says Shekhar.
"With modest 7% FY18 earnings growth and only inorganic growth expected to offer near-term re-rating catalysts, we maintain our "neutral" with a lower $1.60 target price," says Shekhar.
As at 1.08pm, shares in China Aviation Oil are down 6 cents at $1.52 or 10.7 times FY18.
