China Aviation Oil - DBS Research 2018-08-06: Delivering Steady Growth

CHINA AVIATION OIL(S) CORP LTD SGX:G92

China Aviation Oil - Delivering Steady Growth

China Aviation Oil (CAO)’s 2Q18 net profit up 14% y-o-y to US$29.3m, in line with expectations, on better optimisation activities.
Net cash position of US$200m or c. 32 Scts per share.
More acquisitions could provide a further boost to earnings growth for CAO.
Maintain BUY, and Target Price of S$1.98.

We like China Aviation Oil (CAO) 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 CAO’s greater scale.
Furthermore, it is a beneficiary of growing air travel demand in China and globally.

~ SGinvestors.io ~ Where SG investors share

China Aviation Oil had a net cash position of c.US$200m (or c.32 S-cts per share) at the end of June 2018 and recently completed a US$8m acquisition that will help expand its presence in Europe and its bottom line.
We believe the company will continue to look out for more deals with its strong balance sheet, which would help grow its business in the long term.

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.

Given that 80% of its earnings is derived from monopolistic businesses with a firm growth outlook, we see current valuations at 10.1x FY18PE, declining to 9.3x FY19F PE, as attractive. Factoring in net cash per share of S$0.32, 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.

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.

China Aviation Oil reported 2Q18 results that were in line with our expectations, as net profit for the quarter rose by 14% y-o-y to US$29.3m. At half-time, net profit was up by c. 14% y-o-y to US$56.2m, versus our full-year profit growth projection of 12%.
Revenue for the quarter rose by 58% y-o-y to US$5.8bn on higher volumes handled as well as higher oil prices while it was higher by 42% for the first six months to US$9.9bn. Gross profit for the quarter rose by 55% y-o-y to US$16.4m due to better optimisation activities while for 1H18, gross profit rose by 14% y-o-y to US$29.6m.
Contributions from associates rose by a marginal 1.7% y-o-y in the quarter to US$18.6m, as forex losses offset higher operating profits at SPIA leading to lower contribution of 2.5% y-o-y to US$15.7m though OKYC saw its contribution increase 20% y-o-y to US$2m. For 1H18, associate contributions rose by 19% y-o-y to US$39.6m.
The group remains in a strong net cash position of over US$206m as at end-June 2018, which will allow it to continue to look for acquisitions to expand and grow its business in an earnings-accretive manner.
As results are in line, we maintain our estimates, recommendation and Target Price.

Paul YONG CFA DBS Group Research Research | https://www.dbsvickers.com/ 2018-08-06

SGX Stock Analyst Report BUY Maintain BUY 1.980 Same 1.980