SINGAPORE (Feb 28): Edison Investment Research is initiating coverage of China Aviation Oil (Singapore) Corporation (CAO) at “buy” with a target price of $1.53, after the group last week reported a 45% rise in FY16 earnings to US$88.9 million ($125.7 million).
Additionally, the research house says its cash and peer-based fair value of US$1.45 ($2.04) on the stock suggests potential for investors.
(See also: China Aviation Oil posts 45% rise in FY16 earnings to US$89 mil)
In a report on Monday, analysts Andy Chambers and Alexandra West highlight CAO as a “direct play on the rapidly rising demand for air travel in China, augmented by both international and product expansion”.
In their view, CAO’s 33%-owned joint venture (JV) at Shanghai’s Pudong International Airport (SPIA), which owns and operates the airport’s entire refuelling infrastructure, has provided the group a healthy dividend income.
“With the airport currently being expanded, the demand for jet fuel should continue to grow rapidly which, combined with the exclusive import licence to the PRC, provides a firm foundation for investors,” comment Chambers and West, adding that the growing trading and supply of oil is supportive of their 14% EPS CAGR estimate over the next two years.
As the largest physical trader of jet fuel in Asia, CAO’s closest peer comparator is World Fuel Services, which currently trades at a 48% premium to CAO.
The analysts say this is “unwarranted” given CAO’s unique exposure to the fast-growing Chinese aviation market – hence, they value the core CAO operations using a DCF given its relative stability offered as a physical jet fuel supplier as well as trader.
“Paper trading of oil contracts is limited to 10% of total trade volume, with 90% backed by physical contracts substantially de-risking the activity. The cost plus per barrel nature of the sole source import supply contract to China provides further stability as well as a gross margin premium return compared to normal trading activity,” they elaborate.
If CAO can secure “resilient and progressive growth” as per its Vision 2020 strategy, Chambers and West believe that returns can be enhanced even further as the company expands its international standing.
“CAO is a well-capitalised and cash-generative company. The stability afforded by the associates’ large contributions also acts as a buffer against undue oil market volatility. With a positive net cash inflow in 2016, CAO currently has cash balances of c. US$187 million,” note the analysts.
As at 2.44pm, shares of CAO are trading flat at $1.52.
