China Aviation Oil Singapore Corp (CAO SP) - Sleep Soundly At Night
- Coming in above our expectations, 4Q16 results were a pleasant positive with better profit contributions from its associates, particularly SPIA, being a primary growth driver.
- CAO also announced a better-than-expected dividend of S$0.045.
- Going forward, management expects the SPIA associate and its fuel distribution business to continue to perform as the China aviation industry continues to boom.
- Maintain BUY with target price raised to S$2.21 with a 2017 dividend yield of 3.2%.
Associates push results above expectation.
- China Aviation Oil Singapore Corp (CAO) reported a 4Q16 PATMI of US$17.9m (+57.0% yoy) on US$3.3b in revenue (+65.2% yoy).
- The associates’ better performance (36.7% yoy to US$13.3m) were a primary reason why results came in above expectation.
- The 47.07% yoy increase in jet fuel supply and trading volume also helped overall gross profits.
Stellar performance from the associates, especially SPIA.
- With rebounding oil prices and higher refueling volume, the group’s crown jewel - its stake in Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA associate) - beat our expectation with a 68.7% increase in contribution to US$13.6m. However, we do wish to highlight that approximately 30% of shared profits that we attribute to the increase in oil price may not be sustainable.
- Nonetheless, growth in refuelling volume should sustain at the low-teens going forward. Contributions from other associates also experienced positive growth.
Better-than-expected dividends as well.
- The positive 4Q results also came with a better-than-expected dividends S$0.045 (forecasted S$0.04) as the company keeps to its 30% payout policy.
- SPIA associate will continue to shine as star performer. In view of Shanghai’s importance as a global business hub, we expect SPIA to continue to generate strong recurring income for the group with a growth rate of around 12%.
- We further note potential for future growth as the Shanghai airport builds a new terminal that will allow it to become one of the world’s top three busiest airports in 2019.
Outlook bright amid Chinese civil aviation industry growth.
- The burgeoning Chinese civil aviation industry achieved total turnover volume of 81.9b tonne-kilometres (+12.6% yoy) as of Nov 16 and looks set to sustain a 10% growth rate until 2020.
- Management expects CAO to continue to benefit from this robust growth in China’s civil aviation industry and the global aviation industry. The company also continues to grow its jet fuel network outside of China (43 airports across 17 countries).
- We have raised our earnings growth forecasts for 2017/18 by 10.0% and 11.6% respectively on better-than-expected associate performance.
- We also reckon that there is significant upside risks to our estimates if the jet fuel market remained in contango.
- Maintain BUY with target price raised to S$2.21 based on 14.4x 2017F PE, pegged at a 20% discount to peers’ average PE of 18x.
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- 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.