China Aviation Oil - RHB Invest 2019-08-13: Slower But Sure Growth; Reiterate BUY


China Aviation Oil - Slower But Sure Growth; Reiterate BUY

  • Maintain BUY with a lower SGD1.50 Target Price, from SGD1.60, 27% upside with 3.8% yield.
  • We reduce China Aviation Oil (SGX:G92)’s forecasts by 2% to account for a lower growth in overseas jet fuel volumes amidst expectations of slower growth in global aviation traffic.
  • Nevertheless, we remain confident in China Aviation Oil’s long-term growth, which should be driven by growth in China’s aviation traffic. This, in addition to an increase in passenger capacity at Shanghai Pudong International Airport (SPA) provides scope for an upside surprise.
  • Its ex-cash 5.2x 2020F P/E and below P/BV multiple remain compelling.

China’s international aviation traffic continues to grow.

  • For the first six months of 2019, China’s aviation passenger traffic registered an 8.5% y-o-y growth, while its international aviation passenger traffic has grown 16.6% y-o-y. All international flights flying out of China are required to use imported jet fuel, which is supplied only by China Aviation Oil.
  • Amidst expectation of some negative impact from the US-China trade war, we have conservatively forecasted mid single-digit jet fuel supply volume growth in 2019. This compares with an average volume growth of c.11% in the last 10 years.

SPIA to witness strong volume growth from 2020.

  • During 2Q19, profit contribution from Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), a 33%-owned associate that accounted for 56% of China Aviation Oil’s 2Q19 PBT, was up 8.3% y-o-y to USD16.9m, amidst an improved profitability of its operations.
  • For 1H19, the jet fuel volume at SPIA was largely unchanged. However, the completion of capacity expansion by end- 2019 could translate into a high growth rate in traffic at SPA and enable SPIA to register higher-than-estimated jet fuel volume growth in 2020-2021.

Cash balance has shrunk but there is scope for inorganic expansion.

  • China Aviation Oil’s net cash balance dropped q-o-q to USD210m in 2Q19 from USD379m in 1Q19, amidst a large increase in trade receivables and payment of dividends. Nevertheless, a zero debt balance sheet and large net cash position (c.29% of its market cap), should enable China Aviation Oil to undertake a large earnings-accretive acquisition.
  • China Aviation Oil has been seeking opportunities to grow its jet fuel business outside China.

Reiterate BUY.

  • Despite outperforming the STI Index by 8% YTD, China Aviation Oil’s stock continues to trade at a 2020F P/E of 7.3x (ex-cash FY20F P/E of 5.2x). This compares with a conservative estimated 2020F earnings growth remains cheap vs regional and global peers. See China Aviation Oil's share price performance.

Shekhar Jaiswal RHB Securities Research | 2019-08-13
SGX Stock Analyst Report BUY MAINTAIN BUY 1.50 DOWN 1.600