SINGAPORE (Sept 6): Maybank Kim Eng says it likes China Aviation Oil (CAO) as one of the largest jet fuel physical traders in the Asia Pacific (APAC) region, the group’s strategy for the expansion of its core China jet fuel supply business, as well as its reasonable valuations.
In an unrated report issued on Wednesday, analyst Neel Sinha says the stock is trading at a reasonable 10.3 times FY17 P/E based on consensus estimates, and at about 8.5 times on an ex-cash basis, underpinned by 8% and 10% profit growth expectations for FY17 and FY18, respectively.
CAO is among the largest jet fuel traders in the region, and the only licensed importer for bonded jet fuel into China.
Sinha also notes that the group’s efforts to diversify its jet-fuel-centric revenue base has driven its growth in trading volumes of other products, such as in crude oil, in recent years – while it also enjoys a steady and rising cash flow from investments in oil-related assets like pipelines and storage.
“China was one of the fastest growing outbound tourism markets in the past decade, accounting for c10% of total global outbound travel. It is expected to remain so as it has a burgeoning ‘travel-ready’ middle class that is set to drive a 4.5-5% CAGR in passenger traffic and a doubling of outbound travel to 200m by 2025, according to various industry forecasts,” observes Sinha.
In his view, CAO is primed to benefit from this structural growth trend, being the sole licenced importer of bonded jet fuel into China.
“While the market lacks listed peers with a somewhat similar business model and product mix, the nearest comparable, in our view, World Fuel Services trades at a 32-45% P/E premium for these years. Profit volatility, storage costs, energy market prices and physical delivery failure are key risks,” concludes the analyst.
As at 11.59am, shares in CAO are trading 2.2% lower at $1.54.
