China Aviation Oil Singapore - RHB Invest 2018-03-20: The Return Of Steady Earnings Growth

China Aviation Oil Singapore - RHB Invest 2018-03-20: The Return Of Steady Earnings Growth CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil Singapore - The Return Of Steady Earnings Growth

  • We came back positive from our recent meeting with China Aviation Oil Singapore (CAO) and feel more confident about the return of earnings growth in 2018. Growth would be aided by strong contribution from SPIA, supply of jet fuel into Chinese aviation traffic and a more rationalised approach on the trading business.
  • We believe CAO’s dedicated M&A team could deliver earnings-accretive M&A during 2H18 or early 2019. 
  • We increase 2018-2019 earnings by 2-5% and upgrade CAO to BUY (from Neutral), with a higher SGD1.80 Target Price (from SGD1.60, 17% upside).

Steady growth in jet fuel supply and trading business. 

  • Volumes for supply and trading of jet fuel grew at 8% in 2017. With continuing strong growth in Chinese aviation traffic along with increased contribution from supply of jet fuel to global airports, we assess that 8-9% y-o-y growth in jet fuel trading and supply volumes is sustainable during the forecast period.

Decline in gasoil trading could be positive. 

  • With recent management changes and the revised strategy for its trading business, we assess that China Aviation Oil (CAO) could witness some decline in gasoil trading from 2018. This may be positive for CAO, as our financial model suggests that gasoil trading most likely led to lower profitability for the middle distillates business in 2017.
  • While we forecast a 15-20% decline in gasoil trading in 2018-2019, we have not imputed any improvement in profitability for this business segment yet.

CAO’s stake in SPIA is almost equal to the former’s market capitalisation.

  • Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), a 33% owned associate of CAO, offers aircraft refuelling services at Shanghai Airport. 
  • SPIA’s contribution to CAO has increased from USD10m in 2008 to USD64m in 2017. With upcoming capacity expansion at the Shanghai Airport, SPIA’s earnings could grow 13-15% during 2018-2019. 
  • SPIA’s business model is similar to Bangkok Aviation Fuel Services Pcl (BAFS TB, NR), which is listed on the Thai stock exchange and is currently trading at 24x P/E. Even at a 30% discount to BAFS’ valuation, CAO’s equity stake in SPIA could be worth USD995m as compared to its current market cap of USD1,011m.

A large M&A is likely and may require capital raising. 

  • As the jet fuel trading and supply business outside China is well-developed and competitive in nature, any M&A with meaningful earnings contribution would have to be large in size and would come at premium valuations. 
  • With only USD180m of net cash on the balance sheet, we assess that CAO may have to raise capital to fund a large M&A. We believe CAO may tap the debt market soon as we see a likelihood of an M&A activity during 2H18 or early 2019.

Upgrade to BUY. 

  • We have aligned the target P/E, P/BV, EV/ EBITDA multiples along with the WACC assumptions with current market conditions and peer comparisons. 
  • Our revised Target Price of SGD1.80 implies a 12.2x 2018F P/E. We expect EPS growth of 12% in 2018, implying a 2018F PEG of 1.0x, which we believe is fair.

Shekhar Jaiswal RHB Invest | 2018-03-20
RHB Invest SGX Stock Analyst Report BUY Upgrade NEUTRAL 1.80 Up 1.600