China Aviation Oil - DBS Research 2016-11-03: Cruising towards record 2016

China Aviation Oil - DBS Vickers 2016-11-03: Cruising towards record 2016 CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil - Cruising towards record 2016

  • 3Q16 net profit up 31% y-o-y to US$23.2m, as several associates benefited from one-offs.
  • Continued organic growth supported by robust long-term growth of Chinese civil aviation and further expansion into new international markets.
  • Sitting on US$202.8m war chest, which could be used towards value-accretive acquisitions.
  • Maintain BUY and TP of S$1.70.


Maintain BUY with TP of S$1.70 as our 2017 outlook remains unchanged. 

  • Registering a 31% y-o-y jump in net profit to US$23.2m in 3Q16, China Aviation Oil (CAO)’s results were above expectations, as several associates benefited from oneoffs such as mark-to-market inventory gains and favourable currency movements.
  • While our FY17F earnings are intact, we lift FY16F earnings by 4% as we adjust for slightly higher supply and trading volumes.


Sole supplier of imported jet fuel in China with growing international presence. 

  • With monopoly on the supply of bonded jet fuel to China’s civil aviation industry, CAO should benefit from the long-term growth of China’s international air travel market. 
  • Furthermore, with the backing of SOE parent China National Aviation Fuel Group (CNAF), CAO has expanded its business to marketing and supply of jet fuel at 43 international airports outside China, and further growing its reach, volumes, and ultimately achieving greater economies of scale.


Firm outlook for prized asset 33%-owned associate, SPIA. 

  • As the exclusive supplier of jet fuel to Pudong International Airport, Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA) has and should carry on to benefit from rising air traffic at the airport, which is driven by the continued development of Shanghai as China’s key financial centre. 


Net cash and strong balance sheet could fund acquisition-driven growth. 

  • With net cash of c.US$203m at the end of 3Q16, and strong support from its parent CNAF, we believe that CAO could be on the lookout for acquisitions to further grow the scale and reach of its business and profits.


Valuation

  • Our TP of S$1.70 is based on 12x FY17F PE. 
  • We think that 12x earnings against the projected 18% EPS CAGR over FY15- FY17F is reasonable, and believe that the group is poised to see a structural re-rating of its valuation multiple on sustained earnings growth, especially if CAO can utilise its strong cash balance to further accelerate growth through M&A.


Key Risks to Our View

  • Weaker demand for air travel and execution risk. A sustained slowdown in demand for air travel could impact jet fuel demand and volumes. 
  • Further, the group could also face execution risk in its trading business and prospective M&A activities.




Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-11-03
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.700 Same 1.700




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