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China Aviation Oil — Progress in a backward market

China Aviation Oil — Progress in a backward market

China Aviation Oil (Singapore) Corporation (CAO) has made good progress in the first half of the year, benefiting from favourable volume growth offset to a degree by FX and the non-recurrence of positive stock valuation. Trading conditions look more challenging in the second half with the jet fuel market having moved into backwardation since early July. We are thus taking a much more cautious view on the second half and have reduced our forecasts accordingly. It is important to recognise that cash generation has been far stronger than expected and should remain favourable in H2 as inventory is released and the main associate dividend is received. Thus, our fair value actually increases to US$1.55 (S$2.11) per share from US$1.45 (S$2.04) as a result.

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Written by

China Aviation Oil (Singapore)

Progress in a backward market

H117 results update

Aviation services

14 August 2017

Price

S$1.56

Market cap

S$1342m

S$1.357/US$

Net cash (US$m) at 30 June 2017

260

Shares in issue

860.2m

Free float

29%

Code

G92

Primary exchange

SGX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.8)

(3.1)

2.3

Rel (local)

(9.0)

(5.2)

(11.5)

52-week high/low

S$1.8

S$1.3

Business description

China Aviation Oil (Singapore) Corporation (CAO) is the largest physical jet fuel supplier and trader in Asia. It holds the sole import licence for bonded jet fuel into China, and has nascent businesses in the US and Europe. Of its five associates, the most important is SPIA, which supplies all jet fuel to Shanghai Pudong Airport.

Next events

Q3 results

November 2017

Analysts

Andy Chambers

+44 (0)20 3681 2525

Roger Johnston

+44 (0)20 3077 5722

China Aviation Oil (Singapore) is a research client of Edison Investment Research Limited

China Aviation Oil (Singapore) Corporation (CAO) has made good progress in the first half of the year, benefiting from favourable volume growth offset to a degree by FX and the non-recurrence of positive stock valuation. Trading conditions look more challenging in the second half with the jet fuel market having moved into backwardation since early July. We are thus taking a much more cautious view on the second half and have reduced our forecasts accordingly. It is important to recognise that cash generation has been far stronger than expected and should remain favourable in H2 as inventory is released and the main associate dividend is received. Thus, our fair value actually increases to US$1.55 (S$2.11) per share from US$1.45 (S$2.04) as a result.

Year end

Revenue (US$m)

PBT*
(US$)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/15

8,987

62.4

7.2

2.1

16.0

1.8

12/16

11,703

89.9

10.4

3.3

11.1

2.9

12/17e

13,073

96.2

11.1

3.3

10.4

2.9

12/18e

14,680

108.8

12.5

3.8

9.2

3.3

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Steady H1 progress

The core trading volumes expanded positively as revenues increased 55% in H1, or by US$2.5bn to US$7.0bn. The gross margin fell 14bps to 0.37% but gross profit was up almost 13% at US$26.0m. The main associate, SPIA, the largest contributor to group net income, experienced a flatter than expected first half. Trading volumes were strong but the absence of stock profit and the 5% decline in the renminbi against the US dollar offset this. Overall, the associates’ contribution fell by 1% to US$33.2m. Interest income rose as net cash balances increased ahead of expectations, but overall EPS progression of 4.5% was steady.

Second half challenging for core trading

The jet fuel market moving into backwardation has implications for the storage associates and the core trading business. Both are expected to experience tougher H2 trading conditions as inventory is sold down across the market. As a result, we have reduced our earnings forecasts by 7% for FY17 and FY18, as gross margins in trading are squeezed and storage utilisation rates fall. However, the US$83m increase in net cash to US$260m in H1 should be followed by an additional strong H2 inflow. This provides potential for M&A targeted at CAO’s supply chain to increase the efficiency of delivery of traded volumes in line with group strategy. With 47 airports now serviced outside of China, the expanded regional footprint of the core trading activity should provide new opportunities.

Valuation: Underpinned by healthy cash base

Although the trading outlook has tightened since the half year, the cash position is far better than anticipated. Our fair value of US$1.55 (S$2.11) per share is therefore 7% (3%) higher than when we initiated in February. A return to stronger growth in FY18 should permit further progress in the valuation.

Interim results

Exhibit 1: China Aviation Oil (Singapore) interim results summary

Six months to June (US$m)

H116

H117

% change

Revenues

Middle distillates

3,309.5

4,881.3

47.5%

Other oil products

1,178.1

2,102.5

78.5%

Group revenue

4,487.6

6,983.8

55.6%

Gross profit

23.08

26.03

12.8%

Gross margin

0.51%

0.37%

EBITDA

15.19

17.85

17.5%

Associates

33.55

33.20

-1.0%

PBT

49.64

52.01

4.8%

Net income

47.77

49.88

4.4%

EPS (c)

5.55

5.80

4.5%

Net cash

211.4

260.3

65.6%

Source: China Aviation Oil (Singapore) reports

Core trading operations

The volume of products supplied and traded increased by 2.03mt to 15.66mt, of which the increase was evenly split between middle distillates and other oil products. Middle distillates volume in the period was up 11.6% or 0.99mt, representing 71% of the total traded. Jet fuel volumes grew 1.13mt (16.8%) with a small reduction in the supply of other middle distillates. Jet fuel supply accounted for 83% of middle distillates volume. Supply of other oil products increased by 20% to 6.12mt.

Exhibit 2: Volumes of oil products traded

Six months to June (mt)

H116

H117

% change

– Jet fuel

6.74

7.87

16.8%

– Other

1.80

1.66

-7.8%

Middle distillates

8.54

9.53

11.6%

Other oil products

5.09

6.12

20.2%

Total

13.63

15.66

18.4%

Source: China Aviation Oil (Singapore) H117 report

Revenues for the group increased by 56% in the first half to almost US$7bn, driven by higher oil prices and the 18% volume increase. Gross profit increased by US$2.9m to US$26.0m, (H116: US$23.1m), a margin of 0.37% (H116: 0.51%).

Associates surprisingly flat during H117

Exhibit 3: Share of associates’ contribution to profit before tax (US$000s)

Associate

Activity

Stake

H116

H117

% change

SPIA

Sole jet fuel supplier and all infrastructure at Shanghai Pudong International Airport

33%

29,606

29,038

-1.9%

TSN-PEKCL

Pipeline transportation of jet fuel to Beijing Capital and Tianjin Binhai international airports

49%

1,806

1,563

-13.5%

Xinyuan

Tank storage facilities in Guangdong province China

39%

120

236

96.7%

OKYC

Largest independent storage tank terminal in South Korea

26%

2,499

2,739

9.6%

CNAF HKR

Plane refuelling at Hong Kong International Airport at Chek Lap Kok

39%

-484

-373

22.9%

Total

33,547

33,203

-1.0%

Source: China Aviation Oil (Singapore) reports

The share of profits from associates before tax was lower than expected in the first half. The reason was largely the flat performance of the main associate, SPIA, in which CAO has a 33% interest. It runs the supply system of jet fuel at Shanghai Pudong International Airport, one of the fastest growing airports in the world. While volume growth was very strong, profits did not benefit from the positive mark to market of buffer inventory experienced in H116 due to the rise in jet fuel prices. In addition, the Chinese renminbi weakened by 5% against the US dollar, which adversely affected translation on consolidation. While the storage facilities investments and the Hong Kong refuelling performed well, these are much smaller, as is the jet fuel pipeline operator in China, which saw profits fall significantly due to lower volumes and other operating income.

The most positive feature of the first half was the strength of cash generation, largely due to working capital requirements and notably the reduction in inventory levels held for trading during the period of almost US$52.5m. As a result, the US$100m borrowing facility was paid down and net cash increased to US$260m from US$187m at the end of FY16. Overall, net bank interest income improved by US$1m to US$1.4m. Net income rose 4.4% to US$49.9m, which translated to a similar increase in H117 EPS to 5.80 US cents per share (H116: 5.55 US cents).

Outlook

Core trading activities face increased challenges in H2

The core strategy remains unaltered. Demand for air transport and thus for jet fuel continues to grow strongly, especially in China. CAO continues to expand its supply of jet fuel to an increasing number of airports globally, currently 47. It also continues to diversify into the supply of other oil products internationally. As the largest jet fuel trader in Asia, it mitigates its risk primarily through back-to-back supply contracts that account for around 90% of volumes traded, with the remainder essentially an opportunity to optimise margins. While the development of the core trading activity should provide an element of growth for CAO in the longer term, the movement into backwardation of the jet fuel market creates a less favourable environment for the oil trading activities as future prices are lower than spot. Essentially this leads to direct pass through trades to fill supply contracts, which tends to limit optimisation strategies with an adverse impact on gross margins.

Associate growth remains a key earnings and cash driver

When combined with the continued growth of the dividend stream from the associate investments in related supply areas around Asia, the core trading diversification strategy should continue to drive growth in shareholder returns in the longer term. In particular, the fundamentals that drive SPIA should continue to be favourable. Specifically, a fifth runway is due to open in Q417 and a new terminal hub in 2018. The expectation is that growth of demand for jet fuel in the rapidly growing airport will be very strong, driven by the resultant increase in air traffic volumes, and that SPIA should see corresponding growth in its performance with healthy margins in local currency terms. Meanwhile it should be noted that the South Korean storage associate is likely to see capacity utilisation drop, reversing some of the H117 improvement.

Financials

The balance sheet is going to continue to strengthen in H217 as inventories are released and as the company receives a significantly increased FY16 dividend from SPIA. The greater challenges in the trading operations have led us to reduce our earnings forecasts for both this year and next. This is despite higher net interest income and the expected improvement in SPIA’s contribution in H2.

Exhibit 4: Forecast revisions

Sales (US$bn)

Net income (US$m)

Net cash (US$m)

Old

New

% chg

Old

New

% chg

Old

New

% chg

2017e

13.23

13.07

-1

102.1

95.2

-7

225

320

+42

2018e

14.92

14.68

-2

115.6

107.7

-7

269

378

+41

Source: Edison Investment Research estimates

Exhibit 5: Financial summary

US$m

2014

2015

2016

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

17,061

8,987

11,703

13,073

14,680

Cost of Sales

(17,034)

(8,952)

(11,659)

(13,028)

(14,627)

Gross Profit

27.4

35.4

44.0

44.3

52.8

EBITDA

 

14.7

25.9

30.2

31.3

41.4

Operating Profit (before amort. and except.)

 

13.9

25.2

29.6

30.8

36.3

Intangible Amortisation

(0.7)

(0.7)

(0.5)

(0.2)

(0.2)

Net income from associates

38.3

38.6

60.5

62.0

68.0

Exceptionals

0.8

(0.8)

(0.3)

0.0

0.0

Other

0.0

0.0

0.0

0.0

0.0

Operating Profit

52.4

62.3

89.2

92.5

104.1

Net Interest

(2.8)

(0.7)

0.3

3.7

4.7

Profit Before Tax (norm)

 

48.8

62.4

89.9

96.2

108.8

Profit Before Tax (FRS 3)

 

49.6

61.6

89.5

96.2

108.8

Tax

(0.5)

(0.4)

(0.6)

(1.0)

(1.1)

Profit After Tax (norm)

48.3

62.0

89.2

95.2

107.7

Profit After Tax (FRS 3)

49.2

61.3

88.9

95.2

107.7

Average Number of Shares Outstanding (m)

860.2

860.2

860.2

860.2

860.2

EPS - normalised (c)

 

5.6

7.2

10.4

11.1

12.5

EPS - normalised fully diluted (c)

 

5.6

7.2

10.4

11.1

12.5

EPS - (IFRS) (c)

 

5.7

7.1

10.3

11.1

12.5

Dividend per share (c)

1.5

2.1

3.3

3.3

3.8

Gross Margin (%)

0.2

0.4

0.4

0.3

0.4

EBITDA Margin (%)

0.1

0.3

0.3

0.2

0.3

Operating Margin (before GW and except.) (%)

0.1

0.3

0.3

0.2

0.2

BALANCE SHEET

Fixed Assets

 

279.3

273.7

288.2

296.7

306.2

Intangible Assets

2.4

1.8

1.6

1.5

1.5

Tangible Assets

6.8

6.2

5.7

5.5

5.4

Investments

270.1

265.6

281.0

289.7

299.3

Current Assets

 

1,099.4

571.9

1,056.2

915.6

1,033.0

Stocks

38.1

56.8

170.7

65.4

71.2

Debtors

823.1

296.0

316.0

326.8

356.0

Cash

94.3

170.5

287.3

319.7

378.0

Other

143.9

48.5

282.2

203.7

227.8

Current Liabilities

 

(819.0)

(246.7)

(688.4)

(489.6)

(541.2)

Creditors

(819.0)

(246.7)

(588.4)

(489.6)

(541.2)

Short term borrowings

0.0

0.0

(100.0)

0.0

0.0

Long Term Liabilities

 

(6.2)

(6.2)

(6.3)

(6.3)

(6.3)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(6.2)

(6.2)

(6.3)

(6.3)

(6.3)

Net Assets

 

553.5

592.6

649.7

716.3

791.7

CASH FLOW

Operating Cash Flow

 

85.9

92.7

37.8

160.3

84.9

Net Interest

(4.5)

(2.8)

(0.7)

0.3

3.7

Tax

(0.4)

(0.5)

(0.4)

(1.0)

(1.1)

Capex

(0.5)

(0.4)

(0.4)

(0.6)

(0.6)

Acquisitions/disposals

0.0

0.0

0.0

0.0

0.0

Financing

0.0

0.0

0.0

0.0

0.0

Dividends

(13.7)

(12.8)

(19.3)

(26.7)

(28.6)

Other

(0.4)

(0.1)

(0.4)

0.0

0.0

Net Cash Flow

66.6

76.2

16.8

132.4

58.3

Opening net debt/(cash)

 

(27.7)

(94.3)

(170.5)

(187.3)

(319.7)

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

(94.3)

(170.5)

(187.3)

(319.7)

(378.0)

Source: China Aviation Oil (Singapore) reports, Edison Investment Research estimates

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by China Aviation Oil (Singapore) and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Frankfurt +49 (0)69 78 8076 960

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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by China Aviation Oil (Singapore) and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). 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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Paysafe Group — Growth normalises

Paysafe’s H117 results show that organic constant currency growth is moderating to low double-digit rates, after an exceptional period of growth in 2016. Profitability was strong during the period, helped by the strong growth and margins of the Asia Gateway business. The sale of Asia Gateway and the acquisition of MCPS will both help reduce the group’s exposure to online gambling, and MCPS will strengthen the group’s position in bricks and mortar payment processing.

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