SINGAPORE (May 30): RHB Research is maintaining its “buy” call on China Aviation Oil (CAO) with an unchanged target price of $1.80 or 11.9 times FY18F earnings.
This comes after RHB hosted the group’s recently-appointed CFO, Xu Guohong, at a non-deal roadshow (NDR), where Xu reiterated the group’s focus on growing its core jet fuel business via higher investments in international operations.
In a Monday report, analyst Shekhar Jaiswal opines that CAO’s valuations remain compelling, considering how CAO's share price of $1.61 is 0.73 times FY18F PE growth.
The analyst projects 14.6% EPS growth in 2018, and maintains that Shanghai Pudong International Airport Aviation Fuel Supply (SPIA) will remain the group’s key growth driver in the near-term – even as SPIA considers lowering its dividend payout in view of infrastructure investments needed to match the airport’s capacity expansion.
“CAO estimates that commencement of operations at Shanghai Pudong Airport’s fifth runway later this year could lead to a 0.3m tonnes increase in jet fuel supply volume being handled by SPIA. These volumes are expected to increase further once the airport’s new satellite terminal is operational in 2019,” recounts Jaiswal of his key takeaways from the recent NDR.
He adds that while CAO did acknowledge investor concerns over its parent firm’s market share of China’s domestic jet fuel market, it believes such an event is unlikely in the near-term given China National Aviation Fuel’s (CNAF) high barriers to entry.
“CNAF’s strong existing infrastructure and large specialised labour force makes it difficult for competitors to build a significant presence within the country. CAO believes that, instead of competing, new entrants could prefer to collaborate with CNAF while building a presence in China,” he explains.
Jaiswal, however, is keeping his forecast estimates based on a payout ratio of 30% despite CAO’s FY17 dividend payout ratio of 33%, in view of the company’s mandate to undertake acquisitions to grow its international jet fuel business.
RHB nonetheless views the company’s strong cash flow generation and limited capex requirements as an implication that CAO could still continue to pay higher dividends if it does not undertake an acquisition during the forecast years.
“We remain confident on CAO’s ability to deliver 15% growth in 2018, and maintain that the completion of an earnings-accretive M&A in 2H18 could lead to a stock re-rating,” concludes Jaiswal.
As at 11:01am, shares in CAO are trading 1 cent lower at $1.57 or 1.27 times FY18F book.
