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

China Aviation Oil - DBS Group Research 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. 

Maintain BUY with Target Price of S$1.98, as we favour CAO as an aviation growth proxy.

  • 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.

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Positive steps on the M&A front.

  • 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.

Where we differ:

  • We have not factored in acquisitions in our forecasts and target price.

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 8x 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 10.1x 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.

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 - Steady growth in earnings by CAO a contrast to volatile airline earnings

  • 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