SINGAPORE (June 20): CGS-CIMB Research is keeping its “add” call on China Aviation Oil (CAO) with an unchanged target price of $2.03, after the jet fuel trader signal its intention to streamline its associate portfolio.
CAO on Tuesday announced plans to divest its entire remaining 39% stake in its associate company, China Aviation Oil Xinyuan Petrochemicals Co.
As CAO is a subsidiary of a China state-owned enterprise (SOE), the proposed disposal will be via a listing-for-sale through the Beijing Equity Exchange. No tentative completion deadline was disclosed.
However, CGS-CIMB lead analyst Cezzane See believes the sale will have a “negligible impact” on CAO’s profitability.
“Xinyuan is a minor contributor to CAO’s share of associates’ profit,” says See in a Tuesday report. “In 1Q18, Xinyuan contributed US$0.2 million, or a mere 0.9%, to CAO’s share of associates’ profit of US$21.0 million.”
The way she sees it, the proposed sale could be CAO’s way of streamlining its portfolio assets, following its exit from the petrochemical trading business.
On the other hand, See opines that CAO’s focus will remain on its “associate gem” – Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA) – which accounted for 90.1% of its associate earnings in 1Q18.
Already, Shanghai Pudong airport has started trial runs on its fifth runway, which See says could drive FY18F refuelling volumes for SPIA. In addition, SPIA's 2019F volumes could grow further with the completion of the airport's satellite terminal, which is expected to boost passenger capacity to 80 million.
Further, See opines that CAO is poised for M&A opportunities, as it looks to expand its global jet supply and trading network.
“We are positive on CAO's expansion beyond being just a China-centric player,” See says. “We continue to favour CAO as a proxy for China’s growing outbound travel, as well as its expanding international footprint and healthy balance sheet.”
As at 11.59am, shares of CAO are trading 1 cent higher at $1.53, implying an estimated price-to-earnings ratio of 9.9 times and a dividend yield of 3.0% for FY19.
