Simons Trading Research

Author: simonsg   |   Latest post: Fri, 3 Apr 2020, 3:08 PM


China Aviation Oil - Stellar FY19 But Covid-19 Clips 2020’s Wings

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  • China Aviation Oil (SGX:G92)'s 12M19 net profit of US$99.8m was strong, and ahead at 104.9%/106% of our/consensus’ FY19F forecasts (S$95.1m/S$94.2m) on higher GPMs.
  • We expect FY20F to be impacted by Covid-19 as China Aviation Oil’s main earnings are linked to China’s aviation industry, in our view. We cut FY20-21F EPS.
  • We lower our rating to HOLD (from Add), with a lower target price of SGD1.25, now based on PER of 8.5x (close to long term average mean) rolled-forward to FY21F PER.

Net Profit Grows 6.4% to Highest Point Since FY06

  • Despite softer FY19 associate earnings (-9.1% y-o-y to US$65.5m), a stronger EBIT of +32% y-o-y (due to high gross profits [+16.9% y-o-y] , stringent cost controls and higher interest income) helped to drive net profit to US$99.8m (+6.4% y-o-y), the highest since China Aviation Oil’s organisational restructuring in FY06.
  • A final DPS of 4.7Scts was announced, close to our expectation of a 30% payout.

Stellar EBIT on Trading and Optimisation Activities

  • China Aviation Oil's FY19 GP jumped 16.9% y-o-y on higher middle distillate supply and trading volumes (+22.2% y-o-y) and higher gains derived from trading and optimisation activities that took gross profit margins (GPM) to 0.29% (vs. our 0.23% forecast).
  • Stringent cost controls, reversal of provision for expected credit loss (ECL), and higher other income led to FY19 EBIT growing to US$43.6m (+32% y-o-y).

Softer Associate Earnings on Lower Wholesale Prices

  • FY19 associate earnings fell, primarily on the lower contribution from Shanghai Pudong International Airport Aviation Fuel Supply (SPIA) of US$58.8m (-9.8% y-o-y); brought about by lower wholesale aviation prices and rates charged to Chinese airlines, by China National Aviation Fuel Group (CNAF), that had a knock-on effect on SPIA’s revenue.

Covid-19 Likely to Affect Near-term Prospects

  • According to the International Air Transport Association (IATA) on 20 Feb 2020, data from China showed passenger numbers were down 40% y-o-y during the recent peak Chinese New Year period vs. comparable period in 2019. IATA also said the virus could potentially result in a 13% full-year loss of passenger demand for carriers in the Asia- Pacific region, bulk of which would be borne by Chinese carriers.
  • We cut our FY20F EPS by 16.4% on lower revenues, gross profits and SPIA earnings (FY19 had a high base in 1H19). FY21F EPS is reduced due to lower SPIA’s earnings with the lower wholesale prices in China.

Lower Call to Hold in Light of Near-term Headwinds

  • While we like China Aviation Oil as a longer-term proxy for China’s growing outbound travel, and for its healthy balance sheet, we see muted share price movement with the near-term headwinds.
  • Our lower target price is now based on 8.5x. FY21F P/E (from 11x; close to its long-term average mean).
  • Catalysts: higher earnings, more dividends.
  • Risks: prolonged Covid-19 impact.

Source: CGS-CIMB Research - 26 Feb 2020

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