2H21 results below expectations
<Earnings First Take!> China Aviation Oil (CAO SP): 2H21 results below expectations
- 2H21 net profit of US$16.1m (-50.8% h-o-h, -33.9% y-o-y) was below our expectations, bringing full-year net profit to US$40.4m which was 31.2% below our estimate.
- Sequential deterioration in gross profit to US$23.0m (+0.6% h-o-h, -22.7% y-o-y) in 2H21 due to a decrease in total supply and trading volume to 14.5m tons (-7.7% h-o-h), tempered by higher trading profits during the period (gross profit per ton: 2H21 – US$0.92/ton, 2H21 – US$0.89/ton).
- Decline in contribution from JVs and associates to US$20.9m (-53.7% h-o-h, -64.3% y-o-y) in 2H21, primarily due to a drop in refueling volumes at SPIA owing to sporadic outbreaks in China, and drag from its Korean associate, Oilhub Korea Yeosu.
- Net cash position rose to US$401m (S$0.47/share) as of Dec-20, from US$269m in Dec-19, due to favourable working capital changes, though offset by considerably lower dividends from its associates.
- Final DPS of 1.90Scts per share declared, down from 2.58Scts per share in FY20, for an implied payout ratio of 30% and yield of around 2.0%.
Our thoughts:
- CAO’s disappointing performance in 2H21 could persist in the near-term given 1) Omicron will likely translate into more domestic lockdowns in China, and negatively impact flight activity in the country, reducing demand for jet fuel in the country, 2) China’s international borders could remain closed until late-2022, and this will further impede recovery in CAO’s jet fuel volumes, and 3) Brent crude oil will likely remain backwardated for some time, given how tight the market is at the current juncture, especially with geopolitical tensions over in Ukraine, which will likely weigh on trading profits.
- The management highlighted that they will seek opportunities for strategic expansion through investments in synergistic oil-related assets and businesses, and the Group’s robust balance sheet can certainly digest a moderately large acquisition. However, we are doubtful that anything will materialise anything soon because of the Group’s lack of a track record.
- Valuation is less attractive now given the Group’s dimmer earnings prospects at 12-15x forward P/E, which is in-line with peers in the sector and at +2.0SD above its five-year average.