Long-term growth story of China Aviation Oil intact; weaker 2Q results only a blip

SINGAPORE (Aug 15): China Aviation Oil (CAO) reported a 2.9% fall in 2Q19 earnings to US$28.4 million from US$29.3 million in 2Q18.

Revenue increased 2.9% to US$6.0 billion from US$5.8 billion a year ago as total supply and trading volume increased 6.62% to 10.63 million tonnes.

Volume for jet fuel rose 19.41% to 4.06 million tonnes. Volume for gas oil rose 44.35% to 1.66 million tonnes for 2Q19. However, volume of other oil products fell 9.41% to 4.91 million tonnes.

Cost of sales increased 2.9% to US$5.9 billion, bringing 2Q19 gross profit to US$17.1 million, 4.3% higher than a year ago.

Other operating income increased 52.7% to US$1.9 million from US$1.2 million a year ago.

While administrative expenses dropped by 29.7% to US$2.7 million, other operating expenses grew 227.5% to US$4.6 million.

Share of profits from associates was 3.0% higher at US$19.2 million, mainly due to higher profit contributions from Shanghai Pudong International Airport Aviation Fuel Supply (SPIA).

Share of profits from SPIA increased to US$17.0 million from US$15.7 million in 2Q18, attributable mainly to higher refuelling volumes and lower operating expenses, while the share of profits from other associates decreased by 25.6% to US$2.18 million, mainly due to lower contribution from OKYC (Oilhub Korea Yeosu Co) as its earnings were partly affected by foreign exchange loss.

DBS Group Research likes CAO’s “monopolistic aviation business”, as it is the sole importer of bonded jet fuel in Chia, allowing it to grow alongside increasing travel demand there, while gaining traction globally. CAO has a 33% stake in the exclusive jet fuel refueller at SPIA.

In an Aug 8 report, analyst Paul Yong believes that CAO did well in its 1H19 results, considering the weaker global economy.

“With a new management team on board that was seconded from parent CNAF (China National Aviation Fuel Group Corp), and a recent acquisition in Europe under its belt, CAO is well poised to deliver on more value-accretive acquisitions to boost its long-term prospects, using its strong cash position,” says Yong, who has a “buy” call on CAO with a target price of $1.85.

Also reiterating its “buy” call on CAO is RHB Research, albeit with a lower target price of $1.50 to account for a lower growth in overseas jet fuel volume amid expectations of slower growth in global aviation traffic.

In an Aug 13 report, analyst Shekhar Jaiswal says, “Nevertheless, we remain confident in CAO’s long-term growth, which should be driven by growth in China’s aviation traffic. This, in addition to an increase in passenger capacity at SPIA provides scope for an upside surprise.”

Additionally, CGS-CIMB Research has kept its “add” recommendation on CAO with a target price of $1.70.

In an Aug 7 report, analyst Cezzane See says, “We still see CAO as a longer-term proxy for China’s growing outbound travel and like its healthy balance sheet.”

As at 2.09pm, shares in CAO are trading flat at $1.15, implying 0.9 times FY19 book with a dividend yield of 3.8%, based on RHB’s valuations.