China Aviation Oil Singapore - RHB Invest 2017-06-28: Strong Organic Growth At Undemanding Valuation

China Aviation Oil Singapore - RHB Invest 2017-06-28: Strong Organic Growth At Undemanding Valuation CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil Singapore - Strong Organic Growth At Undemanding Valuation

  • After generating 20% YTD return, CAO’s share price has been trading sideways amidst lack of M&A-related announcements. However, we maintain that it is on track to deliver strong organic growth over 2017- 2019, aided by the rapidly-growing Chinese aviation market and increased business diversification. 
  • Maintain BUY and SGD1.90 Target Price (14% upside) as the stock continues to trade at undemanding valuations (0.68x 2017F PEG). 
  • A strong net cash position always offers inorganic growth scope through earnings-accretive acquisitions, in our view.

Chinese aviation traffic still strong. 

  • China Aviation Oil Singapore (CAO) is the largest jet fuel trader with a monopoly on imported jet fuel supply to China’s aviation industry. It is a direct proxy to rapidly-growing outbound aviation traffic from China to the rest of the world. International passenger traffic here (inbound and outbound) has grown at double digits in the last two years and is likely to register similar growth over the next few years, as more Chinese travel overseas. 
  • We expect jet fuel supply volumes to grow at 8-15% over 2017-2019.

Strong growth in other oil products business. 

  • This segment includes trading revenue from gasoil, fuel oil, aviation gas and crude oil. Earnings from this industry tend to be volatile and more risky, vis-à-vis CAO’s jet fuel supply business. 
  • This segment recorded losses in 2014-2015. However, it has been profitable for all five quarters in a row starting 1Q16. We expect this segment to report strong growth in 2017-2018, aided by double-digit volume growth and gradual expansion in margins.

Growing profit contributions and dividend receipts from associates. 

  • While most of CAO’s other associates are running at full capacity – which would limit their growth potential – 33%-owned Shanghai Pudong Airport’s exclusive jet fuel supplier Shanghai Pudong International Airport Aviation Fuel Supply Co Ltd (SPIA) should witness 15-19% growth in 2017-2019. This is as the airport plans a 33% increase in its passenger handling capacity by 2019. 
  • SPIA accounts for 90% of CAO’s associate earnings and 66% of PBT. It also pays ~90% of its earnings as dividends.

Resilient growth company. 

  • CAO has diversified its revenue base aggressively as a part of its internationalisation strategy. China’s contribution to its revenue declined to 51% in 2016 (2010: 80%). During the same period, total revenue doubled to USD11.7bn. 
  • Thanks to strong growth in China’s aviation market, CAO has delivered strong profit growth too, even in a weak oil price environment.

Maintain BUY and SGD1.90 Target Price. 

  • We remain bullish on CAO’s share price outlook as it remains on track to deliver steady earnings growth and higher dividend yields. 
  • We derive our Target Price of CAO using an average of forward P/E, P/BV, EV/adjusted EBITDA and DCF of adjusted FCFs. Our Target Price implies 11.3x 2017F P/E. We are projecting an estimated 16.6% growth in EPS in 2017, implying 0.68x 2017F PEG, which makes the stock a compelling investment. 
  • Upside risks include acquisition of an earnings business in 2017, while downside risks include the opening up of China’s aviation fuel market.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2017-06-28
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.900 Same 1.900