China Aviation Oil - DBS Research 2018-03-01: Associates Continue To Shine

China Aviation Oil - DBS Vickers 2018-03-01: Associates Continue To Shine CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil - Associates Continue To Shine

  • China Aviation Oil (CAO)'s FY17 net profit of US$85.3mn (-4% y-o-y) misses our projections by 5% due to higher than expected taxes.
  • Outlook remains positive given firm global air travel demand, led by strong growth in China.
  • Net cash of US$180mn and strengthened management team should help M&A ambitions.
  • Maintain BUY with S$1.98 Target Price (13x FY18F PE).

Maintain BUY

  • Maintain BUY with an adjusted Target Price of S$1.98, as we still favour China Aviation Oil as an aviation growth proxy. 
  • 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 at Shanghai Pudong International Airport (SPIA). It also has a growing international jet fuel supply and trading business that will increasingly benefit from China Aviation Oil’s greater scale. It is a beneficiary of growing air travel demand both in China and globally as well.

Net cash of US$180mn or S$0.27 ps to help fund inorganic growth. 

  • China Aviation Oil had a cash balance of US$300mn, or net cash of US$180mn, at the end of 2017 and has also recently refreshed and strengthened its management team with seconded personnel from parent China National Aviation Fuel Group Ltd (CNAF). We believe this could help the company deliver on the M&A front.

Where We Differ:

  • We have lower-than-consensus forecasts as we are more conservative on trading gains in 2018F.

Potential Catalysts:

  • China Aviation Oil’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.


  • Valuations attractive at 8.5x FY18F ex-cash PE. Given that 80% of its earnings is derived from monopolistic businesses with a firm growth outlook, we see current valuations at 10.7x FY18PE, declining to 9.8x FY19F PE, as attractive. 
  • Factoring in net cash per share of S$0.28, valuations are even more enticing. 
  • Our target price is based on 13x FY18F PE, or +1 SD of its historical average, and has not factored in acquisitions.

Key Risks to Our View

  • Weaker demand for air travel and execution risk. A sustained slowdown in demand for air travel could hit jet fuel demand and volumes. Further, the group could also face execution risks in its trading business and on prospective M&As.

WHAT’S NEW - Better associate contributions offset by higher tax expenses and lower trading gains 

  • China Aviation Oil’s full-year results missed our expectations by 5%, with net profit declining 4% y-o-y to US$85.3mn as tax expenses were higher than we expected. The company maintained its full-year dividend at 4.5 Scts, which is equal to a c.30% payout.
  • Full-year revenues rose 39% y-o-y to US$16.3bn on higher oil prices as well as supply and trading volumes, which increased by 14.6% y-o-y to 37.31mn tonnes. Gross profit, however, fell by 12.1% y-o-y to US$38.7mn on lower gains from trading and optimisation activities, as “markets reclined to backwardation in 3Q17 further exacerbated by increase in supply & operational costs incurred due to various supply disruptions caused by weather and refinery outages”.
  • Contributions from associates rose by 7.8% y-o-y to US$71.5mn, led by a 5.8% y-o-y increase in contribution from SPIA to US$64.2m while all other associates also saw improved performances. Tax expenses jumped 133% y-o-y to US$6.9mn mainly due to the decline in deferred tax assets following the utilisation of unabsorbed tax losses from prior years to offset current year’s profits, the increase in recognition of deferred tax liabilities on the share of undistributed retained earnings from associates, and tax expenses incurred on the transfer of shareholding.

Outlook remains positive. 

  • Looking ahead, with international travel expected to grow at a double-digit pace in China for the next few years, China Aviation Oil’s jet fuel import business segment as well as its key associate SPIA, which we estimate together account for over 80% of China Aviation Oil’s earnings, are set to benefit.
  • In particular, with a fifth runway in Shanghai Pudong soon to start commercial operations, contribution from SPIA is well poised to enjoy firm growth ahead.
  • Meanwhile, continued expansion in its international jet fuel supply business will also help its trading business to reap benefits from a greater scale and network. 
  • China Aviation Oil has cash of over US$300mn (net cash of US$180mn) and we believe that with a refreshed and strengthened management team (seconded from parent CNAF), the group will step up on its efforts on the M&A front to make value accretive acquisitions, which could act as a further re-rating catalyst for the stock.
  • We lower our FY18 and FY19 earnings estimates by 2.6% and 2.4% respectively, factoring in higher associate contributions offset by lower gross profit and higher tax expenses. Our Target Price is now S$1.98, from S$2.08 previously, mainly due to a weaker USD/SGD rate.

Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2018-03-01
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.98 Down 2.080