China Aviation Oil Singapore Corp (CAO SP) - Beneficiary Of US Dollar Strength And Oil Price Contango
- As China Aviation Oil Singapore Corp (CAO) reports and receives revenue in US$ but remains listed in S$, it benefits significantly from the rising strength of the US$ (up 8.2% since Jun 16).
- We raise our 2016 estimate by 7.5%, given that the intact contango oil market is delivering free profits. However, we opine that these factors have yet to be priced in as trading has been sideways, but this will change once CAO reports record-breaking results in Feb 17.
- Maintain BUY with target price raised to S$2.01.
US$’s 8.2% appreciation against S$.
- The US dollar has appreciated 8.2% against the Singapore dollar from its low of US$1.00:S$1.34 in Jun 16 to S$1.00:S$1.45 currently.
- Our house view is that the US dollar will continue to appreciate against the Singapore dollar to hit an exchange rate of US$1.00:S$1.48 by end-17.
Oil price trending up with contango spread intact.
- Following the OPEC’s recent deal, oil prices have been trending up again with the contango spread (between the current spot price and the futures price), in line with the market’s optimistic view towards future oil prices. Compared with Jun 16 where the one-year contango was at about US$2.00-3.00, the one-year contango had reached about US$4.00-5.00 in Dec 16.
Beneficiary of US$ strength.
- China Aviation Oil Singapore Corp (CAO) reports in US dollars with all of its revenue and gross profits derived in US dollars, although a majority of its associate contributions are in renminbi.
- For example, its crown jewel (associate), Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), receives its revenue in US dollars and its dividends to CAO are contributed in renminbi terms. Hence, the absolute US dollar amount of CAO’s associate contributions will be impacted, but this amount is minimal and the impact should definitely be more than offset by the strength of the US dollar. As such, given the continued strength of the US dollar, its Singapore dollar listing looks a lot more attractive.
Oil price contango delivers free profits to CAO.
- Oil distributors benefit immensely from an oil price contango environment as they are able to buy oil immediately at a lower price while arranging for deliveries at a later date and higher prices. This macro tailwind is expected to give CAO’s trading profits a fairly significant boost.
US$ strength and oil price contango yet to be priced in.
- We expect CAO to benefit from US dollar strength and optimism towards oil prices, but it appears that the market has yet to price in these factors in as the share has largely been trading sideways. We believe that these factors will be reflected once CAO delivers record-breaking annual results in Feb 17.
- Its most comparable peer, Bangkok Aviation (BAFS TB) is trading at 22.2x historical PE vs CAO’s 10x. We would also like to highlight that CAO boasts a net cash balance of US$203m (24.2% of market cap) and 2017 yield of 3.2%.
- We have raised our earnings forecast by 7.5% for 2016 on better-than-expected trading profits but keep our 2017-18 forecasts unchanged to be conservative.
- We note that there is significant upside risks to our estimates if the jet fuel contango market remains intact.
- Maintain BUY and we raise our target price to S$2.01 based on 14.4x 2017F PE on the back of our projection of the US$/S$ exchange rate rising to1.48 by end-17, pegged at a 20% discount to peers’ average PE of 18x.
SHARE PRICE CATALYST
- Exceptional results that will prove the viability of CAO and the potential it has.
- A steeper jet fuel future contango market will likely enhance trading profits.
- Any M&A announcements on earnings accretive fuel assets will also likely result in share price reviews.