China Aviation Oil - DBS Research 2017-07-28: Raising Target Price And Forecasts

China Aviation Oil - DBS Vickers 2017-07-28: Raising Target Price And Forecasts CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil - Raising Target Price And Forecasts

  • CAO's interim earnings were ahead of our expectations, with 4.4% y-o-y growth to US$49.9m as volumes grew.
  • Raising FY17 and FY18 forecasts by 4% and 6% respectively.
  • Inclusion in MSCI Singapore Small Cap Index should mean a sustained higher valuation multiple.
  • Maintain BUY with raised TP of S$2.08.



Maintain BUY with higher TP of S$2.08, as we raise our valuation multiple to 13x FY18 PE. 

  • We continue to like China Aviation Oil given its monopolistic position as the sole importer of bonded jet fuel into China, and for its 33% stake in the exclusive jet fuel refueller (SPIA) in Shanghai Pudong International Airport. 
  • It also has a growing international jet fuel supply and trading business that will increasingly benefit from CAO’s greater scale. 
  • It is a beneficiary of growing air travel demand both in China and globally as well.


WHAT’S NEW


Interim results better than we expect though below consensus 

  • CAO’s 1H17 numbers were slightly above our expectations but below consensus, as we had one of the lowest forecasts on the street. 
  • At half-time, revenue rose by 56% y-o-y to US$7bn mainly on higher average price of oil as well as higher total volumes of 14.9% y-o-y to 15.66m tonnes. 
  • Gross profit for the six months rose by 13% y-o-y to US$26m (above our full-year projection of 5% growth), which was roughly in line with volume growth. Volume growth was ahead of our expectations.

Operating profit rose by 17% y-o-y to US$18.8m as operating costs were well managed. 

  • Contribution from associates dipped by 1% y-o-y to US$33.2m, in line with expectations, as key associate SPIA’s contribution fell slightly to US$29m from US$29.6m on a weaker RMB (However, we believe in RMB terms, SPIA registered double-digit earnings growth). As a result, net profit for 1H16 rose by 4.4% y-o-y to US$49.9m (versus our full-year projection of 2.5% decline).


Where we differ: 

  • We have lower-than-consensus forecasts as we do not expect mark-to-market gains in 2017 and 2018, which is dependent on higher oil prices, to be as strong as in 2016.


Potential catalysts: 

  • CAO’s share price should re-rate as it delivers steady earnings growth and/or if it can make value accretive acquisitions using its strong balance sheet position.


Raising FY17F/FY18F forecasts by 4%/6%. 

  • We are raising our FY17F and FY18F forecasts for CAO to factor in better volumes for its jet fuel supply business and also a better than previously projected contribution from its key associate SPIA.


Valuation

  • Maintain BUY with higher TP of S$2.08, based on 13x FY18F PE. 
  • CAO’s recent inclusion in the MSCI Singapore small cap index should lead to a sustained elevated valuation multiple, and at 12.5x FY17F PE, it is still trading at a substantial discount to peers' average of 18x FY17F PE. 
  • We raise our valuation multiple for CAO from 12x to 13x PE, and factoring in raised FY18F forecasts, derive a new TP of S$2.08 for CAO.


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 on prospective M&A.




Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2017-07-28
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.08 Up 1.850



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