• Maintain NEUTRAL with SGD1.50 Target Price from SGD1.32 as we roll over our blended valuation to 2019, offering 9% upside and 4% FY19F yield.
• China Aviation Oil reported 2018 PATMI of USD94m (+10% y-o-y), slightly ahead of our and consensus estimates, amidst better-than-expected GP margin. Despite the recent run-up in China Aviation Oil’s share price, its forward valuation seems cheap on an ex-cash basis. Its net cash balance of USD358m accounts for 40% of its market cap.
• However, an expectation of meagre 2.5% earnings growth in 2019; concerns relating to forward oil price staying in backwardation; as well as slowdown in volume growth at SPIA – which accounts for 65% of its PBT – could keep China Aviation Oil’s share price in check in the near term.

4Q18 Results Announced on 28 Feb Were Ahead of Our Estimates

• Against our expectation of USD16.7m PATMI highlighted in our report: China Aviation Oil - RHB Invest 2018-11-21: Ground Checks ~ More Headwinds, CHINA AVIATION OIL(S) CORP LTD (SGX:G92) reported 4Q18 PATMI of USD18.7m, aided by higher gross profit margin. This was partially offset by lower-than-estimated contribution from its key associates.
• Net margin also registered y-o-y and q-o-q improvement amidst lower interest costs and higher interest income.

Earnings Drivers

• Growth in volume for supply of jet fuel into China (a cost plus business); higher profit contribution from Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), a 33% owned associate; and small but maiden full year contribution from recently acquired European business should support 2.5% profit growth in 2019F.
• We raise our 2019- 2020 profit estimates by 3% and introduce 2021 estimates.

New Management Has Identified Its Focus Areas

• Our discussion with China Aviation Oil seems to suggest that the new management team has aligned its focus on achieving profitability over registering volume growth, and growing external business – ie reducing dependence on its sister concerns to support an increase in jet fuel supply and trading volumes.

Key Upside Risks

• China Aviation Oil’s share price has delivered 29% returns in 2019, outperforming the STI by 25%. This sharp recovery in share price has brought the stock’s forward P/BV, P/E and dividend yield close to its 3-year average values.
• We believe that further re-rating would require a stronger recovery in earnings aided by higher jet fuel supply volumes at SPIA and better-than-estimated margins for its core jet fuel supply and trading business.

Source: RHB Invest Research - 01 Mar 2019