Surprise writ of summons unlikely to worsen slow year for China Aviation Oil

China Aviation Oil (CAO) was hit by a negative surprise on 28 July as it was served a writ of summons from Banque De Commerce Et De Placements SA, DIFC Branch. Still, CGS-CIMB analyst Cezzane See has maintained her “hold” call on the stock due to CAO’s strong cash position, which could cover the cost of a legal settlement. While she raised her target price slightly from 85.8 cents to 87 cents, growth is only expected to return in FY2021. 

The writ of summons was issued based on allegations that CAO was involved in fraudulent representations regarding a cargo deal transaction with Zenrock Commodities Trading Pte Ltd. While the exact claim amount remains undisclosed, See believes that this could amount to at least US$19 million ($25.9 million). With a US$406 million cash pile following 1H2020, however, the firm should be able to stomach a legal settlement. 

Nevertheless, it was a quarter to forget for CAO as profits were below expectations in 1H2020. Revenue for 1H2020 fell 44.5% y-o-y despite better margins from CAO’s trading optimisation activities successfully mitigating gross profit shrinkage to 20.3% y-o-y.