China Aviation Oil - DBS Research 2019-03-01: Cash-Rich With Strong Cash Generation


China Aviation Oil - Cash-Rich With Strong Cash Generation

  • China Aviation Oil's FY18 net profit up 10.5% y-o-y to US$94m, 2.5%above our expectations, on higher oil prices.
  • Higher net cash position of US$358m, or c. 55 Scts per share; final dividend of 4.5 Scts (same as 2017).
  • More synergistic acquisitions could further boost earnings growth.
  • Maintain BUY with revised Target Price of S$1.85 (12x FY19 PE).

Cash-rich with strong cash generation

  • Maintain BUY with revised Target Price of S$1.85, as we like China Aviation Oil’s monopolistic aviation businesses.
  • CHINA AVIATION OIL(S) CORP LTD (SGX:G92) continues to benefit from its 33% stake in the exclusive jet fuel refueller at Shanghai Pudong International Airport (SPIA). Its monopolistic position as the sole importer of bonded jet fuel in China allows it to grow alongside increasing travel demand there, while gaining traction globally.

Cash-rich with strong cash generation.

  • China Aviation Oil’s net cash position increased to US$358m from c. US$180m a year ago, representing 47% of its book value or c. S$0.55 per share, as
    1. it stepped up on its receivables collection efforts,
    2. earnings from its core trading business expanded, and
    3. dividends from its crown jewel SPIA also improved.

Management ready to step up on its M&A efforts.

  • With a new management team on board that were seconded from parent CNAF, and a recent acquisition in Europe under its belt, China Aviation Oil is well poised to deliver on more value-accretive acquisitions to boost its long-term prospects, using its strong cash position.

Where We Differ:

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

Potential Catalysts:


  • Target Price of S$1.85 based on 12x FY19 PE. We lower our valuation multiple to 12x FY19 earnings on lower EPS growth projections, but still see value in the stock at less than 6x FY19 ex-cash PE.

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, China Aviation Oil could also face execution risks in its trading business and on prospective M&As.

WHAT’S NEW - CAO FY18 earnings 2.5% above our expectations; expect steady growth going forward

  • Net profit rose 10.5% to US$94m due to increased gross profit from higher oil prices and lower credit loss provision for the year. China Aviation Oil maintained its full-year dividend of 4.5 Scts, in line with the group’s 30% dividend payout policy.
  • Revenue for the full year rose 26.7% y-o-y to US$20.6bn due to higher oil prices despite a 6.6% fall in total supply and trading volume to 34.86m tonnes in FY18. Gross profit rose by 29.2% to US$49.9m despite the lower volume as the company focused on more profitable products and reduced volumes in more competitive segments of the market.
  • Contributions from associates increased 0.8% to US$72.1m, led by a 1.6% y-o-y increase in share of profits from SPIA to US$65.2m. Tax expense of US$6.68m was 3% lower when compared to last year's due to the absence of one-off tax expense incurred from the transfer of shareholding in OKYC.
  • Notably, China Aviation Oil increased its net cash position to US$358m by the end of 2018 from c. US$180m a year ago, and this represents 47% of its book value or c. S$0.55 per share. Its strong net cash position will allow it to continue to look for acquisitions to expand and grow its business in an earnings-accretive manner.
  • Noting the reduction in supply and trading volumes that we saw in 2018, we adjust our assumptions to account for a more conservative organic growth projection for China Aviation Oil. Our FY19 and FY20 forecasts are lowered marginally by 2% and 4% respectively.

Paul YONG CFA DBS Group Research | https://www.dbsvickers.com/ 2019-03-01
SGX Stock Analyst Report BUY MAINTAIN BUY 1.850 DOWN 1.900