SINGAPORE (Apr 3): Edison Investment Research has lowered its fair value on China Aviation Oil (CAO) to $1.82 from $1.88 after the research house rolled forward its peer group and DCF-based valuations by a year.
This is to reflect lower gross margins forecast for CAO’s core oil trading and supply operations, after the group in Feb posted a 21.7% fall in 4Q earnings to US$14 million on higher oil prices.
See: China Aviation Oil reports 21.7% fall in 4Q earnings to $18.5 mil on higher oil prices
See: China Aviation Oil’s 3Q revenue up but earnings down 8%
In a report last Thursday, lead analyst Andy Chambers says the group’s latest set of 4Q results nonetheless saw a meaningful improvement compared to its previous quarter due to a partial recovery from the 3Q low by the year end.
Combined with improved associates’ contribution due to strong air transport growth in China, he believes prospects for renewed progress in FY18 are encouraging – especially in the case of Shanghai Pudong International Airport Aviation Fuel Supply (SPIA), the group’s largest associate in terms of contribution to profits and dividend receipts.
“[SPIA’s] performance was constrained in 2017 as additional required capacity at the airport was under construction, but these are now starting to lift as the new fifth runway comes into operation this year. Not only should volumes start to grow more rapidly, but with lower capital investment requirements its dividend payout ratio is expected to return to 80% in FY18,” explains the analyst.
Looking ahead, Chambers believes CAO’s healthy balance sheet positions the group to pursue development of its supply chain infrastructure globally, especially growth opportunities aligned with China’s One Belt, One Road trade route to Europe initiative.
“The nature of the trading operation is predominantly to supply end customer demand. Thus the risk remains limited, albeit with constrained gross margin optimisation strategies due to lack of supply opportunities. CAO’s global supply chain remains an advantage in this regard, especially in contango supply markets. As CAO continues to grow its international trading and supply we expect further investment in the supporting infrastructure,” he adds.
Shares in CAO closed flat at $1.56 on Tuesday, which is 10.1 times FY19 earnings or what Edison deems is a modest discount to the group’s closest peer, World Fuel Services.
