China Aviation Oil - In prime aviation position
- We hosted an NDR for CAO on 21 Mar. Discussions centered on:
- the outlook for the jet fuel business;
- associate contributions, and
- potential M&As.
- In our view, CAO’s prime position in two major aviation hubs (China and the US) underpins future growth. Net cash position provides financial flexibility for M&As.
- Maintain Add and TP (S$2.28) based on 13x FY18 P/E (c.16% discount to peer average).
Proxy for expansion in China’s outbound aviation market
- CAO’s position as sole imported (bonded) jet fuel supplier in China makes it a proxy for China’s growing outbound travel segment, which we expect to expand with urbanisation and ‘internationalisation’ policies.
- The company shared that under China’s 13th Five Year Plan, the Civil Aviation Administration of China (CAAC) targets to have 260 airports by 2020, with key aviation hubs to serve over 90% of the Chinese population who live within a radius of 100km of each airport.
Stalwart growth geographically
- In 2014, CAO became a member of the LAXFUEL consortium (the largest jet fuel consortium in the US), solidifying its position in one of the world’s largest aviation markets, and in one of the world’s busiest airports, Los Angeles International Airport.
- It currently supplies jet fuel to 43 international airports in 17 countries. Aviation marketing volumes have grown significantly to 2.3m tonnes (from 1.8m in 2015 and 0.2m in 2011).
SPIA to remain the linchpin of associate contributions
- Future associate contributions (FY16: US$66m) are promising, underpinned by income growth of major contributor, Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), in our view. SPIA is the exclusive refueller for Shanghai Pudong airport.
- SPIA’s outlook is bright as not only is Shanghai Pudong International Airport one of the busiest airports in China, it is undergoing capacity enhancements. A fifth runway is slated for completion by end-FY17 or early-FY18 and a new satellite terminal is expected to be completed in FY19F.
- SPIA’s associate contribution rose by 56% to US$60.6m (vs. US$38.9m in FY15) on the back of volume growth (+7.9%) and inventory gains from the oil price rebound in FY16. As we believe the oil price rebound will narrow in FY17-18F, we have assumed that SPIA’s contribution will rise by 6%/6% in FY17/18F. However, we have assumed a higher growth rate of 15% for FY19F, driven by the completion of the new satellite terminal.
Other oil products are variable growth factors
- Volumes of other oil products grew by 112% to 17.6m tonnes in FY16 (FY15: 8.3m tonnes), largely due to the kick-starting of crude oil supply to China (c.6m tonnes) in 3Q16. We understand that the growth was driven by demand from China’s teapot refineries, which Bloomberg Intelligence projects will keep rising in 2017, albeit at a slower rate than in 2016 due to China’s tightening supervision of tax compliance that could limit independent refining throughput growth.
- We forecast that the other oil products segment will see narrower volume growth of 15% p.a. in FY17F, as we believe FY16 benefited from a low base effect.
- Notwithstanding the increase in volumes, we highlight that the other oil products division only accounted for c.5% of CAO’s FY16 gross profit (US$44.1m).
Selective in pursuing M&A opportunities
- We believe that CAO’s cash pile is earmarked for potential M&As. Management shared that it is always on the lookout but is selective in investments, as CAO’s organic earnings growth has risen steadily.
- Management’s preference is strategic assets like SPIA or assets that give it access to more aviation hubs.
Maintain Add; prime position in China and the US
- We like CAO for its prime position in two of the largest global aviation markets which should underpin the continued growth of its core jet fuel business. We forecast jet fuel supply and trading volume growth of 10.6% p.a. in FY17-19F.
- The stock currently trades at a CY18 P/E of 8.8x, at a 43% discount to the global peer average of 15.5x. If we strip out net cash per share of 21.6 UScts, CAO’s CY18 P/E declines to c.6.8x.
- Key risks include weaker jet fuel volume growth and lower contributions from SPIA.