SINGAPORE (Nov 3): Analysts are divided over China Aviation Oil (CAO) after the group saw its earnings fall for the first time in 10 quarters in the 3Q ended September.
RHB Research downgraded the stock to “neutral” with a lower target price of $1.80, from its previous “buy” recommendation with a $1.90 target.
“To account for weak profits from its trading business, we lower CAO’s 2017 net profit estimate by 8% to US$95 million (from US$104 million),” says RHB analyst Shekhar Jaiswal in a Friday report.
CAO after market close on Thursday reported a 7.7% decline in earnings to US$21.4 million in 3Q17 on the back of significantly lower gross profits.
3Q17 gross profit tumbled 58.2% to US$4.3 million due to lower gains from trading and optimisation activities.
See: China Aviation Oil’s 3Q revenue up but earnings down 8%
However, CIMB Research’s lead analyst Cezzane See highlights that associate earnings saved the day for CAO.
3Q17 associate earnings rose 10.4% y-o-y to US$21.5 million as Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA) saw higher refuelling volume and profit margin on the back of a rebound in oil prices, while Oilhub Korea Yeosu Co. (OKYC) improved amid higher profits from tank storage leasing activities.
“Near-term prospects are underpinned by a healthy balance sheet and by growing associate contributions,” See says in a report on Thursday.
“Notwithstanding uncertainties in the oil market that may introduce gross margin swings, we still like CAO for its proxy position to China’s growing outbound travel and expanding international footprint that will underpin its longer-term prospects,” she adds.
CIMB is keeping its “add” rating on CAO with an unchanged target price of $2.08.
Likewise, DBS Group Research is maintaining its “buy” call on CAO with an unchanged $2.08 target price.
“We continue to like CAO given its monopolistic position as the sole importer of bonded jet fuel into China, and for its 33% stake in the exclusive jet fuel refueller (SPIA) in Shanghai Pudong International Airport,” says DBS analyst Paul Yong in a flash note on Friday.
Yong adds that CAO remains on track to meet DBS’s full-year forecasts.
“The company also has a growing international jet fuel supply and trading business that will increasingly benefit from its greater scale,” he says.
RHB’s Jaiswal agrees on the strength of CAO’s rising jet fuel business, which he says remains a good proxy for the rapidly-growing Chinese aviation market.
However, the analyst bemoans the poor visibility on CAO’s merger & acquisition timeline.
“CAO has been trying to put its cash to good use by seeking new opportunities for expansion through investments and M&As in synergetic and strategic oil-related assets and businesses globally. However, we have not seen any progress being made during 2017,” says Jaiswal.
With CAO only recently employing M&A professionals to speed up the inorganic growth process, Jaiswal says any results are likely to only be seen next year.
As at 4.07pm, shares of China Aviation Oil are trading 8.5 cents lower at $1.675, down 4.8%. According to RHB forecasts, this represents an estimated recurring price-to-earnings ratio of 12.3 times and a dividend yield of 2.4% in 2017.
