CAO Q3 2018 update: Short term headwinds

CAO reported a weak set of results for the third quarter of 2018 with net profit falling 8% year on year.

Weaker earnings from its largest associate, Shanghai Pudong (SPIA) and OKYC was the main cause. SPIA was hit with lower earnings despite higher refuelling volumes. SPIA is expanding its facilities (5th runway operational in 1H 2018 and new satellite terminal in 2019) so the company has been expanding headcount and investing in re-fuelling equipment. As the exclusive international jet fuel supplier in Pudong airport, SPIA will benefit from the growth of Pudong airport.

The company’s gross profit performance was the sliver lining during the quarter. Q3 gross profit grew 155% year on year to USD11 million because of higher import volumes into China and higher trading gains.

Volatile quarterly earnings is a common trend for CAO. There have been many instances since 2009 when the company’s quarterly net profit fell at least 20% year on year.

Quarter Net profit yoy growth
4Q14 -67%
3Q14 -67%
4Q11 -43%
1Q15 -27%
3Q10 -27%
4Q13 -26%
2Q12 -26%
4Q17 -22%
3Q12 -22%

Despite the short term swings in profitability, CAO has has doubled net profit over the 2009-17 period.

The market is unhappy with CAO’s Q3 results with its share price falling 6% since the results were released on 1 Nov 2018. I think it’s an over-reaction given the company’s strong track record of growth but I’m keeping a close eye on the situation because there are substantial risks involved in this investment.

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