CHINA AVIATION OIL(S) CORP LTD (SGX:G92)
China Aviation Oil - Compelling Valuations; Reiterate BUY
- BUY, new SGD1.30 Target Price from SGD1.55, 34% upside plus c.5% yield. We cut FY20-21F profit by 6-9% to reflect the decline in aviation traffic, especially in China.
- China Aviation Oil's share price has declined on anticipated near-term earnings weakness, but its monopolistic position in China and cost-plus business model ensures profit and cash flow generation.
- Moreover, a strong net cash balance sheet enables China Aviation Oil (SGX:G92) to undertake large acquisitions. It is trading below its NTA/share of USD0.95 (c.SGD1.30), and at an ex-cash 2020 P/E of just 2.5x.
Will deliver profits despite the decline in jet fuel volume.
- The COVID-19 outbreak has already stalled aviation traffic in China, and will continue to put brakes on international aviation traffic globally. We now expect a 20% decline in jet fuel import volumes into China, as well as a 20% decline in jet fuel pumped by Shanghai Pudong International Airport Aviation Fuel Supply (SPIA) in 2020.
- As the jet fuel imports into China is a cost-plus business, China Aviation Oil will report profits, even if import volume declines. While SPIA (33%-owned by China Aviation Oil) could see margin pressure amidst the decline in jet fuel pumped at the Shanghai Pudong International Airport (SPA), we expect the business to remain profitable.
Recovery in Chinese aviation traffic should support a re-rating.
- With the gradual decline in new COVID-19 cases being reported in China, there is scope for an earlier-than-expected recovery in China’s domestic aviation traffic. While this will not support the recovery in China Aviation Oil’s jet fuel import volumes that are dependent on China’s international aviation traffic, SPIA could report better-than-expected jet fuel volumes for 2020.
- It is worth noting that SPIA accounts for c.65% of the China Aviation Oil’s PBT. Stronger-than-estimated results for SPIA for 2020 should also lead to a resumption of dividend payments to China Aviation Oil, thereby further improving the latter’s net cash position.
Valuations remain compelling.
- Following the sharp decline in China Aviation Oil's share price, the stock is now trading below its net tangible asset value per share and at 6.8x 2020F P/E (ex-cash FY20F P/E of just 2.5x). Our SGD1.30 Target Price implies 1.0x P/NTA, which we believe is reasonable for a profitable and FCF-generating business.
- In addition, given its significant net cash position (c.63% of its market cap); China Aviation Oil should be in a position to undertake a sizable earnings-accretive acquisition.
- See China Aviation Oil Share Price; China Aviation Oil Target Price; China Aviation Oil Analyst Reports; China Aviation Oil Dividend History; China Aviation Oil Announcements; China Aviation Oil Latest News.
Risks to our rating.
- Key downside risks to our rating and Target Price are losses at its trading business despite all the risk control measures, opening up of the Chinese aviation fuel market risking China Aviation Oil’s monopoly, and a higher-than-estimated aviation traffic decline in 2020.
Shekhar Jaiswal
RHB Securities Research
|
https://www.rhbinvest.com.sg/
2020-03-12
SGX Stock
Analyst Report
1.30
DOWN
1.550
