SINGAPORE (Aug 2): RHB is reiterating its “buy” recommendation on China Aviation Oil (CAO) with a target price of $1.80. CAO is also the research house’s Singapore Top Picks.

In a Thursday report, analyst Shekhar Jaiswal says that he remains positive on the group’s strong recovery in its profit growth for 2018.

On Wednesday, the group announced that its 2Q18 earnings have increased by 14% y-o-y to US$29.3 million ($40 million), mainly due to higher gross profit and stable profit contributions from associates.

The group’s total revenue for the quarter was 57.9% higher y-o-y at US$5.8 billion, primarily due to higher oil prices and the increase in volume.

<hr/><a href="https://www.theedgesingapore.com/china-aviation-oil-reports-14-rise-2q-earnings-us293-mil-higher-gross-profits-and-steady">See: China Aviation Oil reports 14% rise in 2Q earnings to US$29.3 mil</a><hr/>

The earnings results came in about 20% above RHB’s estimates. This outperformance was largely attributed to strong growth in profit from the group’s jet fuel and gasoil trading businesses, which are reported under the “middle distillates” segment.

“As the forward price curve for crude oil remains in backwardation, we believe this strong profitability for its jet fuel trading business may not be sustainable for the rest of 2018,” says Jaiswal.

In addition, 4Q tends to be a seasonally soft quarter for the group’s trading business.

“While ‘other oil products’ business stayed profitable for the 11th straight quarter, we estimate gross profit for this business segment had declined y-o-y in 2Q18,” adds Jaiswal.

During the quarter, the group’s profit contribution from its associates saw a 2% y-o-y growth to US$18.6 million, which came in below RHB’s expectations.

All of the group’s associates, except Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), a 33%-owned associate of CAO that offers aircraft refuelling services at Shanghai Airport, registered positive earnings growth in 2Q18.

Although volume for jet fuel supply at SPIA increased 10% in 2Q18, earnings contribution from SPIA was down 2.6% in USD terms and 9.4% in CNY terms during 2Q18.

“We remain bullish on CAO’s share price outlook, as it is still on track to deliver steady earnings growth in 2018 after a weak 2017,” says Jaiswal.

As at 11.05am, shares in CAO are trading at $1.53 or 1.11 times FY19 book with a dividend yield of 3.0%.

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