CHINA AVIATION OIL(S) CORP LTD (SGX:G92)
China Aviation Oil - Key NDR Takeaways; Reiterate BUY
- China Aviation Oil (SGX:G92) remains a good proxy to the Chinese aviation industry. We hosted management for a tele-non-deal roadshow (NDR) and came back feeling positive about its earnings revival from 4Q20 – aided by gradual improvements in China’s domestic aviation traffic.
- Reiterate BUY and SGD1.25 Target Price, 23% upside and 4% 2021F yield.
- China Aviation Oil’s monopolistic position there and cost-plus business model should continue to ensure positive FCF 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.
Recovering domestic aviation traffic in China.
- With moderation in COVID-19 in China, there is scope for an earlier-than-expected recovery in domestic aviation traffic. Aviation regulator Civil Aviation Administration of China noted m-o-m improvement in April aviation traffic. Shanghai Pudong International Airport Aviation Fuel Supply (SPIA), the exclusive aircraft refuelling services provider at Shanghai Pudong International Airport (SPA), could report higher 2H20 jet fuel volumes, as 50% of its traffic are domestic flights.
- SPA recently completed the expansion of a new runway, which could be used to further boost domestic traffic. SPIA, which is 33% owned by China Aviation Oil, accounts for 65% of its PBT.
Contango prices offer trading business opportunities.
- Historically, China Aviation Oil’s trading volumes for other oil products have been quite volatile. However, current contago prices for most oil products offer excellent opportunity for it to grow trading volumes. China Aviation Oil reiterated that 90% of its trades are for physical commodities and back to back in nature.
- Amidst elevated price volatility, it foresees defaults by counterparties as the biggest source of risk in the trading business and continues to follow strong risk management measures. Management highlighted that it did not have any exposure to troubled commodity traders Hin Leong or ZenRock.
Expects to maintain dividend payout of 30%.
- Historically China Aviation Oil has paid 30% of earnings as dividends. In line with growing profits, its DPS has seen a steady rise since 2011. However, amidst expectations of weak earnings from its core jet fuel supply business in China and lower SPIA contributions, we believe China Aviation Oil could pay 3.9 cents DPS in 2020 (2019: 4.7 cents) while maintaining the 30% payout ratio. This translates into a 4% 2021F dividend yield.
Valuations remain compelling.
- China Aviation Oil continues to trade below its net tangible asset value/share of USD0.95 (c.SGD1.30). Its 2021F P/E of 6.8x is below peers. Our SGD1.25 Target Price implies 0.9x P/NTA.
- In addition, a strong net cash position (c.60% of its market cap) should enable China Aviation Oil to undertake an earnings-accretive acquisition, now that valuations for target companies are more reasonable.
- 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
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https://www.rhbinvest.com.sg/
2020-05-12
SGX Stock
Analyst Report
1.250
SAME
1.250
