UOB Kay Hian’s Singapore Research team is generally positive on China Aviation Oil Singapore Corporation (CAO) in an unrated report, in spite of lower profitability levels in the past two years due to Covid-19 as compared to historical levels.
This is in light of how CAO’s balance sheet remains debt free with its net cash at US$205 million ($285 million) as at end-1HFY2022. This translates to a net cash per share of 24 cents, representing 28% of the company’s current share price.
CAO also historically has a monopolistic position supplying jet fuel to airlines at key airports in China which has allowed it to stay afloat during this time.
The group’s recent 1HFY2022 results however were poor with supply and trading volume declining 36% y-o-y to 11.27 million tonnes due to Covid-19. While higher oil prices helped revenue grow 7% y-o-y, net profit fell 19% y-o-y to US$20 million due to higher staff costs, provisions and lower associate contribution from Shanghai Pudong airport as China’s zero-Covid strategy throttled travel. Notably, receivables nearly doubled to US$1.3 billion, and net cash fell 49% during the course of 1HFY2022.
In 2020 and 2021, the company’s net profit fell 44% and 28% y-o-y respectively due to Covid-19-related decline in air traffic, thus negatively impacting CAO’s business as lower volumes were seen in jet fuel supply as well as oil trading.
While Chinese government actions have somewhat benefitted CAO, such as increasing CAO’s refined fuel export volume of 20,000 tonnes, the company’s outlook remains tied to the easing of China’s zero-Covid strategy – and thus travel restrictions – rather than other factors in the next 6-12 months. In addition, additional fuel charges for domestic flights, which in some instances represent about 80% of the ticket price, have currently dampened demand for short-haul domestic flights.
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CAO also has a diversified oil products portfolio comprising of fuel oil, gasoil, gasoline and crude oil, as well as a trading network globally and thus is able to arbitrage pricing opportunities. “We note that in 2021 its arbitrage trade volume was the highest in its corporate history,” writes the team. “We also highlight that aside from jet fuel, CAO has diversified away from its traditional aviation fuels and supplies other fuels to ship owners, power generators and end consumers.”
Given the high oil prices and environmental regulation on carbon emissions, power generating firms have turned to other alternatives, thus threatening CAO’s profitability in the long run, observes the team. Cognisant of such risks, CAO has stated that it will look to incorporate biofuels and carbon credits trading into its portfolio.
The team finds that CAO’s valuations appear fair as it is trading at 2022 annualised ex-cash PE of 10x as compared to its peers' average PE of 8.9x. However on an ex-cash basis and annualising 1HFY2022 earnings per share (EPS), the company currently trades in line with its peers. In 2021, the company generated an return on equity (ROE) of 4.5% vs regional peers' average of over 10%.
As at 10.56am, shares in CAO are trading at 1 cent up and 1.16% higher at 88 cents.
