China Aviation Oil Singapore - RHB Invest 2017-04-25: Growing From Strength To Strength

China Aviation Oil Singapore - RHB Invest 2017-04-25: Growing From Strength To Strength CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil Singapore - Growing From Strength To Strength

  • We raise our 2017F-2019F profit by 5% to account for higher-than- estimated volume growth in 1Q17, which we believe would sustain over the forecast period. 
  • Maintain BUY with revised TP of SGD1.90 (from SGD1.83, 16% upside) as CAO remains on track to deliver steady earnings growth aided by the rapidly growing Chinese aviation market, and increased diversification into other related oil products. 
  • CAO trades at undemanding valuations (2017F PEG of 0.68x) and potential earnings- accretive acquisitions (2017F net cash of USD226m) could re-rate the stock further, in our view.

Strong start to the year. 

  • China Aviation Oil Singapore (CAO) registered a 29% YoY volume growth at its middle distillates (largely jet fuel) business and 81% YoY volume growth at its other oil products business during 1Q17. 
  • Revenue in 1Q17 grew by 126% YoY to USD3.3bn, whilst gross profit grew 17% YoY to USD15.5m. 
  • Earnings contribution from associates was up 5% YoY to USD14.9m. 
  • Net profit of USD11.6m was 5% ahead of our estimate.

Organic growth to continue. 

  • We maintain that CAO’s jet fuel supply and trading volumes should continue to grow in line with the rise in outbound Chinese aviation traffic, and the addition of new international airports to its customer list. 
  • Meanwhile, growth in the trading of other oil products should be driven by CAO’s continuing diversification into synergistic and strategic oil- related assets and businesses. 
  • We estimate jet fuel supply and trading volumes to grow by 10-15% during 2017F-2018F, and volumes for other oil products to grow by 20-30% during the same period.

SPIA to drive growth in associate earnings. 

  • CAO’s 33%-owned Shanghai Pudong Airport’s exclusive jet fuel supplier (SPIA) remains the crown jewel amongst its associate investments. This associate accounts for 90% of CAO’s associate earnings and 66% of its PBT. 
  • SPIA also pays almost 90% of its earnings as dividends. SPIA should witness 15-20% growth during 2017F- 2018F as it would benefit from the rise of Shanghai as a financial centre and the opening of Disneyland. 
  • We also believe SPIA should be able to sustain high volume growth in long term as Shanghai Airport Authority plans to increase its annual airport capacity to 80m by 2019 and 120m by 2035, from 60m currently.

Waiting for an acquisition. 

  • With USD226m in net cash, CAO is well-poised to undertake major acquisitions or investments. While its management remains focused on further expanding its aviation marketing business beyond China, it also has plans to diversify the business by acquiring synergistic oil-related businesses. 
  • While we believe CAO may undertake an acquisition in 2017, the magnitude and nature of potential acquisitions seem difficult to assess at this moment.

Trading at undemanding valuations. 

  • With 16.6% growth and implied P/E of 11.3x, CAO trades at a compelling 2017F PEG of 0.68x, which makes the stock a compelling investment, in our view.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2017-04-25
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.90 Up 1.830