SINGAPORE (April 20): CIMB Research is maintaining its “add” call on China Aviation Oil with $2.28 target price given its jet fuel supply monopoly, expanding international footprint and strategic stake in exclusive fuel supplier for Shanghai Pudong Airport.
In its 1Q17 results announcement last night, CAO reported a net profit of US$25.3 million ($35.4 million). This came within CIMB’s expectations, accounting for 25.6% of its full-year estimate of US$98.8 million. Year on year, higher Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA) contribution drove the overall share of associate and JV contribution up by 5.1%.
(See also: China Aviation Oil posts 4.7% rise in 1Q earnings to $35.4 mil)
SPIA was still the main contributor at US$12.9 million, accounting for 87% of the share of associates and JV. However, TCN-PEKCL’s profits of US$0.78 million versus a loss of US$0.34 million in 4Q16 also provided strength to 1Q17 associate contribution.
As at 1Q17, CAO had a net cash position of 26.1 US cents/share. CIMB says CAO is open to M&A opportunities, but it is selective. “In our view, it is highly likely to opt for strategic assets i.e. SPIA, or assets that give it more access to aviation hubs. In any case, the net cash position accords it financial flexibility to consider such opportunities,” says Cezzane See in a Thursday report.
See likes CAO’s imported jet fuel supply monopoly, which makes it a proxy for China’s growing outbound travel. CAO’s global footprint is also expanding, having gained access to Los Angeles International Airport and Hong Kong International Airport. Then there is its 39% stake in the exclusive fuel supplier for Shanghai Pudong Airport.
“The stock currently trades at a CY18F P/E of 9.6x, c.40% discount to the global peer average of 15.6x, and a CY18F P/E of 7.5x once the current net cash position of 26.1 US cents is stripped out,” adds the analyst.
Downside risks to DBS’s call are weaker-than-expected volume growth in jet fuel and other fuels; lower margins due to lower trading optimisation activities; and lower earnings from associates.
Shares of CAO are up 2 cents at $1.65.
