CHINA AVIATION OIL(S) CORP LTD (SGX:G92)
China Aviation Oil - Poised For Earnings Recovery By End-2020
- China Aviation Oil (SGX:G92) is a good proxy to the Chinese aviation industry, and should witness an earnings revival from 4Q20. Its monopolistic position in China and cost-plus business model ensure free cash flow generation.
- Its stock is trading below its NTA/share of USD0.95 (c.SGD1.30), and at ex-cash 2021F P/E of just 2.6x.
- We lower 2020F profit by 19% to account for slower international aviation traffic recovery and weak 1H20 earnings for SPIA.
Weak 1Q20 earnings.
- China Aviation Oil (SGX:G92) reported disappointing 1Q20 net profit of USD10.8m (-59% y-o-y, -49% q-o-q). This was due to lower attributable profit of USD5.6m (-68% y-o-y, -58% q-o-q) from Shanghai Pudong International Airport Aviation Fuel Supply Co (SPIA), a 33%-owned associate of China Aviation Oil.
- SPIA offers exclusive aircraft refuelling services at Shanghai Pudong International Airport (SPA). Historically, SPIA has accounted for c.65% of China Aviation Oil’s PBT. Earnings were also dragged lower by weak international aviation traffic in China.
Lower earnings in the near term.
- About 20% of China Aviation Oil’s gross profit is attributable to supply of imported jet fuel to China. While the cost-plus model for this business ensures that China Aviation Oil reports profit, earnings growth is linked to China’s international aviation traffic. Even for SPA, c.40% of aircraft movements at the airport accrue from international traffic.
- We now expect international aviation passenger traffic in China and at SPA to start improving only towards end-3Q20 instead of the earlier expectation of end-2Q20. To account for this, we lower 2020 earnings estimates by 19%. We lower 2021F-2022F estimates by 6-7% as well.
Domestic aviation traffic in China is recovering and could still help re-rate the stock.
- With the spread of COVID-19 infections now under control in China, we believe there is scope for an earlier-than-expected recovery in China’s domestic aviation traffic.
- China's aviation regulator (CAAC) noted m-o-m improvement in aviation traffic. Passenger numbers rose 7.9% this month as of 21 Apr, and the number of daily flights rose only 1% in April from March. While this will not support a recovery in China Aviation Oil’s jet fuel import volume that is dependent on China’s international aviation traffic, SPIA could still report higher jet fuel volumes for 2H20.
Valuations undemanding.
- China Aviation Oil continues to trade below its net tangible asset value per share of USD0.95 (c.SGD1.30). Its 2021F P/E of 6.8x is below its peers. Our SGD1.25 Target Price implies 0.9x P/NTA, which is reasonable given the near-term earnings weakness.
- In addition, a strong net cash position (c.60% of its market cap) should enable China Aviation Oil to undertake a sizable earnings-accretive acquisition. Its ex-cash 2021F P/E is just 2.6x.
- 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.
Shekhar Jaiswal
RHB Securities Research
|
https://www.rhbinvest.com.sg/
2020-04-23
SGX Stock
Analyst Report
1.25
DOWN
1.300
