China Aviation Oil Singapore - It Is Time To Re-Fuel Again
- We increase our 2017F-2018F profit by 6-7% to account for higher volume growth, improved margins for its oil trading unit and higher contributions from SPIA.
- Maintain BUY, with a SGD1.83 TP (from SGD1.61, 22% upside) as CAO remains on track to deliver steady earnings growth and higher dividend yields.
- About 20% of its market cap is supported by a net cash position of USD187m, which we believe could potentially be used for an acquisition in 2017.
- We maintain that an earnings-accretive investment in 2017 should lead to a further re-rating of the stock.
Volume growth to continue.
- Jet fuel volume rose 26% to 14.9m tonnes, while volumes for the trading of other oil products rose 112% to 17.6m tonnes in 2016. Jet fuel volume should continue to grow in line with the rise in outbound Chinese aviation traffic.
- Meanwhile, growth in the trading of other oil products should be driven by China Aviation Oil Singapore’s (CAO) continuing diversification into gasoil and fuel oil trading.
- We conservatively estimate both business segments to register 10-15% pa volume growth in 2017-2018.
Other oil product business is now profitable.
- Earnings from this segment tend to be volatile and more risky vis-à-vis its jet fuel supply businesses. CAO had reported losses in this segment during 2014-2015. However, the segment has been profitable in 2016.
- We expect the segment to report strong growth in 2017-2018, aided by a gradual expansion in margins.
SPIA should continue to do well.
- While most of its other associates are running at full capacity – which would limit their growth potential – CAO’s 33%- owned Shanghai Pudong Airport’s exclusive jet fuel supplier (SPIA) should witness 15-20% growth during 2017-2018 as it would benefit from the rise of Shanghai as a financial centre and the opening of Disneyland.
- Shanghai Airport Authority plans to increase its annual airport capacity to 80m passengers by 2019 and 120m passengers by 2035, from 60m passengers currently. It is worth noting that SPIA accounts for 90% of CAO’s earnings from associates and 66% of its PBT.
- SPIA also pays almost 90% of its earnings as dividends.
Expecting cash to be put to some good use.
- With USD187m (SGD264m) in net cash, CAO is well-poised to undertake major acquisitions or investments.
- While CAO’s management remains focused on pushing for higher organic growth, we believe the cash could be used to invest in suitable “asset-light” aviation-related assets outside China.
- We had highlighted in an earlier note (No Near Term Re-Rating Catalyst) that such an acquisition could occur in 2017. We maintain that any earnings-accretive acquisition or investment in 2017 should lead to a further re-rating of the stock.
- We increase 2017F-2018F profit by 6-7% and adjust our TP to SGD1.83, based on a blended valuation method.
- Key downside risks to our call are the removal of CAO’s monopoly in China’s aviation fuel supply market and losses in the oil trading business.