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
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http://www.dbsvickers.com/
2017-07-28
DBS Vickers
SGX Stock
Analyst Report
2.08
Up
1.850
