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Brokers' take: RHB, CIMB split on CAO after profit slips for first time in 10 quarters

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RHB has downgraded China Aviation Oil (Singapore) Corp (CAO) to "neutral" with a S$1.80 target price following the jet fuel supplier's first net profit decline in 10 quarters.

ANALYSTS at RHB and CIMB are split on China Aviation Oil (Singapore) Corp (CAO) after the jet fuel supplier reported its first net profit decline in 10 quarters.

RHB cut the stock to "neutral" with a S$1.80 target price, citing weakness in the company's trading business.

CIMB, however, maintained its "add" call and a target price of S$2.08, arguing for the company's exposure to a booming market.

CAO reported on Thursday an 8 per cent decrease in its third-quarter net profit, to US$21.4 million from a year-ago US$23.2 million amid lower gains from trading activities and optimisation activities.

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RHB analyst Shekhar Jaiswal acknowledged that operational costs due to supply disruptions caused by weather and refinery outages were one-off and should disappear in subsequent periods, but said that overall weakness in the trading business should persist into the final quarter of 2017.

Mr Jaiswal lowered his net profit estimate for full-year 2017 by 8 per cent to US$95 million to account for the unexpected weakness in the trading business.

The analyst noted that CAO has a US$178 million cash pile that the company has been trying to use for strategic investments and mergers and acquisitions. The company has hired professionals to look for opportunities on those fronts, but any moves are only expected in 2018.

"With only a 2 per cent upside by our target price and the lack of near-term re-rating catalysts, we downgrade CEO to 'neutral'," Mr Jaiswal said.

CIMB analysts Cezzane See and Lim Siew Khee also cut their 2017 earnings per share forecast by 4.3 per cent, but they found comfort in the company's share of associate profits and exposure to the Chinese aviation industry.

Contributions from the Shanghai Pudong International Airport Aviation Fuel Supply Co associate rose 8.2 per cent year on year, while Oilhub Korea Yeosu Co's contribution rose about a quarter to US$1.8 million, the analysts said.

Despite short-term variations, the longer-term prospect for CAO remains sound, CIMB added.

"Notwithstanding uncertainties in the oil market that may introduce gross margin swings, we still like CAO for its proxy position to China's growing outbound travel and expanding international footprint that will underpin its longer-term prospects," the analysts wrote.

"Moreover, near-term prospects are underpinned by a healthy balance sheet and by growing associate contributions, driven mainly by the 39 per cent strategic stake in the exclusive fuel supplier for Shanghai Pudong Airport which will see airport capacity enhancements by FY18 to FY19."

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