China Aviation Oil - RHB Invest 2018-05-28: Management Reiterates Growth Outlook

China Aviation Oil - RHB Invest 2018-05-28: Management Reiterates Growth Outlook CHINA AVIATION OIL(S) CORP LTD SGX: G92

China Aviation Oil - Management Reiterates Growth Outlook

  • Maintain BUY and SGD1.80 Target Price, 12% upside.
  • We came back feeling positive from a non-deal roadshow, where we hosted China Aviation Oil (CAO)’s recently-appointed CFO Mr Xu for institutional investor meetings. He reiterated the firm’s focus towards growing its core jet fuel business via increased investments in international operations.
  • We remain confident on CAO’s ability to deliver 15% growth in 2018 and maintain that the completion of an earnings-accretive M&A in 2H18 could lead to a stock re-rating. Trading at 0.73x 2018F PEG, CAO's valuations remain compelling.

Commencement of operations at Shanghai Pudong Airport’s fifth runway

  • China Aviation Oil (CAO) estimates that commencement of operations at Shanghai Pudong Airport’s fifth runway later this year could lead to a 0.3m tonnes increase in jet fuel supply volume being handled by Shanghai Pudong International Airport Aviation Fuel Supply (SPIA). These volumes are expected to increase further once the airport’s new satellite terminal is operational in 2019.
  • SPIA may consider lowering its dividend payout in the near term, as it invests in building the infrastructure to match the airport’s capacity expansion. We maintain that SPIA could remain CAO’s key growth driver in the near term.

Investor Concerns

  • The company did acknowledge investor concerns over the potential loss of parent firm’s China National Aviation Fuel (CNAF) monopolistic position in China’s domestic jet fuel market. However, it believes that such an event is unlikely in the near term.
  • Moreover, CNAF’s strong existing infrastructure and large specialised labour force makes it difficult for competitors to build a significant presence within the country. CAO believes that, instead of competing, new entrants could prefer to collaborate with CNAF while building a presence in China.

Change in CFO

  • The recent change in CFO, with the appointment of Mr Xu Guohong, as well as the addition of new members to CAO’s senior management team appears to be driven by a mandate from CNAF – ie to grow the international jet fuel supply and trading businesses.
  • Based on our discussion with CAO, we assess that an acquisition in assets – relating to refuelling, storage and supply of jet fuel – seems most likely.

Mandated to undertake Acquisition

  • While the company is mandated to undertake an acquisition to grow its international jet fuel business, we assess that strong cash flow generation and limited capex requirements implies that CAO could still continue to pay higher dividends if it does not undertake an acquisition during the forecast years.
  • While the company’s 2017 dividend payout ratio was 33%, our forecast estimates are still based on a payout ratio of 30%.

Valuation remains compelling.

  • Our SGD1.80 Target Price, 12% upside, is derived using average of forward P/Es, P/BVs, EV/adjusted EBITDAs and DCF of adjusted FCFs. Our Target Price implies 11.9x 2018F P/E.
  • We expect EPS growth of 14.6% in 2018, implying a 2018 PEG of 0.73x, which we believe is compelling.
  • Maintain BUY.
  • Key risks to our call include losses being reported at its oil trading business and the opening up of China’s aviation fuel supply market.

Shekhar Jaiswal RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-28
SGX Stock Analyst Report BUY Maintain BUY 1.800 Same 1.800