China Aviation Oil Singapore - RHB Invest 2016-04-27: Continuing Growth Story

China Aviation Oil Singapore - RHB Invest 2016-04-27: Continuing Growth Story CHINA AVIATION OIL SINGAPORE G92.SI 

China Aviation Oil Singapore - Continuing Growth Story

  • A cost plus business model for supply of imported jet fuel into rapidly growing Chinese aviation market should support CAO and its associates’ earnings growth despite volatile oil prices. 
  • Continuing expansion of its overseas businesses should also contribute positively towards its organic business growth. 
  • CAO is proactively sourcing for M&A opportunities, funded by its zero debt balance sheet, large cash holdings and robust free cash flow generation. 
  • Maintain BUY with a DCF-based SGD1.22 TP (previous SGD1.28, 36% upside), implying 0.9x 2016F PEG.

Rising air traffic in China to support growth in jet fuel supply business.

  • Despite the uncertain global economic environment and volatile oil prices, China Aviation Oil (CAO) has managed to deliver positive EBITDA and profit over the past five quarters supported by robust air traffic growth in Chinese aviation industry. 
  • Airbus estimates China to become the world’s largest aviation market by 2034, which in turn should sustained the increase in demand for jet fuel imports into China. 
  • CAO, which has a monopoly on supplying jet fuel for all outbound international flights originating from China, should witness strong growth for its low risk (cost plus business model) jet fuel supply business.

Well poised for inorganic growth as well. 

  • Positive EBITDA contribution from its core business operations and dividends received from its associates should translate into strong cash flow generation for CAO. 
  • We expect CAO to achieve a cash balance of USD259m by end 2018 from USD171m by end 2015. 
  • With no debt on its books and strong cash flow generation, CAO could leverage its balance sheet to undertake an earnings accretive acquisition. 
  • Through organic and inorganic growth, CAO aims to surpass the USD100m profit milestone by 2020.

Incorporating new crude oil price estimate and higher dividend payouts.

  • We lower our 2016/2017 revenue estimates by 8%/2% to account for lower in house crude oil price forecast as compared to our earlier estimates. Net profit increases by 6%/5% as we account for higher profit contribution from its associates. 
  • We also increase our dividend payout estimates, in line with CAO’s latest dividend policy to pay 30% of its net profit as dividends.

Valuations remain undemanding. 

  • CAO’s share price has increased 26% YTD amidst strong earnings growth reported by the group during the last two quarters. 
  • Our DCF-based SGD1.22 TP, which is based on a conservative WACC of 9.5% and 0% terminal growth rate, offers 36% upside and implies an undemanding 11.7x 2016F P/E. 
  • The company’s USD228m worth of cash on the balance sheet accounts for more than 50% of CAO’s current market cap. 
  • Key downside risks include losses being reported by its oil trading business, despite all the risk control measures, and opening up of Chinese aviation fuel supply market would impact CAO’s current monopoly. 

Shekhar Jaiswal RHB Invest | 2016-04-27
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.22 Down 1.28