China Aviation Oil (Singapore) - Strong volumes in tougher trading environment

Q3 results reflected the combined impact on gross margin of the core trading operation due to a return to a backwardation situation in product markets, as well as supply disruptions. More positively, SPIA and the other associates made a stronger contribution. With adverse trading conditions expected to persist for a period of time, management’s strategy to reduce volatility is being tested. The key growth drivers of increasing air traffic and an expanding geographic footprint continue to increase trading volumes and augur well for the future. Maintenance of profitability at a lower margin level while backwardation conditions persist should be offset by stronger growth from SPIA next year, but we now assume a more subdued expansion of the core business. The balance sheet remains supportive of further strategic M&A to facilitate growth. Our fair value falls to S$1.88 from S$2.11.