China Aviation Oil Singapore - RHB Invest 2016-08-10: Organic Growth Outlook Well Priced In

China Aviation Oil Singapore - RHB Invest 2016-08-10: Organic Growth Outlook Well Priced In CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil Singapore - Organic Growth Outlook Well Priced In

  • We increase 2016-18 profit by 15-28% to account for higher profit from SPIA (associate) and trading of other oil products. However, we now rate CAO as NEUTRAL (from Buy) as our revised SGD1.56 TP (from SGD1.22, 0% upside) implies a 1x 2017F PEG, which we believe is fair. 
  • While we estimate steady growth in the jet fuel supply business and profit contribution from its associates, we believe the rise in trading of other oil products comes with increased risks. 
  • We believe earnings accretive M&As will be the key re-rating catalyst for the stock.

Steady growth in jet fuel business. 

  • With a monopoly position on the supply of imported jet fuel to China’s aviation industry, China Aviation Oil (CAO) should benefit from the long term growth of the country’s international air travel market. The company also now markets and supplies jet fuel to 42 airports outside China vs 37 airports last year. 
  • While China’s aviation market offers strong long term growth potential, we subscribe to management’s view that jet fuel supply and trading volumes would grow by high single-digits (8-9% pa) in the near term.

Chinese associate to support cash flows. 

  • CAO’s 33%-owned Shanghai Pudong International Airport Aviation Fuel Supply Co (SPIA) accounts for 90% of its earnings from associates. SPIA also pays almost all of its earnings as dividends, which we include in our DCF calculation. 
  • We believe SPIA will benefit from continued growth at the Pudong air hub, driven by the rise of Shanghai as a financial centre as well as the opening of tourist attractions such as Disneyland. 
  • SPIA accounted for almost 61% of the company’s profit in 2015 and 62% of the company’s profit in 1H16.

Outlook for other oil products remains difficult to forecast. 

  • While the supply and trading of jet fuel oil remain the core business for CAO, a gradual increase in trading of other related oil products is one of the key growth strategies for the long term. 
  • Margins for this business are thin and quite volatile. To improve margins, management plans to build a business presence across the whole supply chain. 
  • While there has been a sharp rise in trading volume for other oil products in 1H16, on an on-going basis, we estimate 8% pa volume growth during the forecast period.

Perfectly priced waiting for M&As to drive share price higher. 

  • We used to value CAO using only DCF-based valuation methodology. However, our revised TP is now derived using an average of forward P/E, P/BV, EV/adjusted EBITDA and DCF of adjusted free cash flow. 
  • Our TP of SGD1.56, implies a 10.7x 2017F P/E. We expect EPS growth of 10.7% in 2017, implying a 1x 2017F PEG, which we believe is fair.
  • With USD228m of net cash balance (23% of market cap), we believe earnings accretive acquisitions will be the only re-rating catalyst for the stock in the near term.

Shekhar Jaiswal RHB Invest | 2016-08-10
RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 1.56 Up 1.220