China Aviation Oil

UOBKayhian on 24 May 2012

Valuation
· We maintain our BUY recommendation on China Aviation Oil (CAO), but with a lower target price of S$1.32. This is due to a lower forecasted dividend payout as the management wishes to retain more cash for earnings-accretive acquisitions going forward. We derive our target price at the average fair value suggested from our dividend discounted cashflow model and the P/E valuation model pegged to its peers group P/E of 8.5x FY12E. The stock is still trading at a discount to the 3-year average PE ratio of 13.6x.

Investment Highlights
· CAO had recently completed the acquisition of China Aviation Oil (Hong Kong) Company Limited (CAOHK) and North American Fuel Corporation (NAFCO) for US$15.7m. CAOHK supplies jet fuel to airline companies at various airports in China, Hong Kong, Taiwan and London. NAFCO is an agent and wholesaler of jet fuel in the United States of America. CAO updates that the NPAT of these two companies amount to approximately US$2m p.a.
· To widen its jet fuel supply network, CAO now provides jet fuel refueling services to China Southern Airlines (CSA) at airports in Frankfurt, Amsterdam, Dubai, Bangkok and Auckland and Air China Airlines at Anchorage and Los Angeles. Going forward, CAO looks to secure more contacts to supply jet fuel to more Chinese airlines refueling at more airports out of China.
· CAO is currently working with MF Global Singapore to retrieve the US$4.3m it had with the bankrupt broker. From the media releases of MF Global, the provisional liquidators have already effected payment to more than 90% of entitled customers since April and thus we believe CAO will be able to write back most of the US$4.3m provision as soon as next quarter.

1Q12 Financial Results
· CAO reported a 4.8% yoy decline in net profit to US$20.4m due to lower contribution from share of results of associates despite stronger revenue and gross profit. CAO reported a 46.4% yoy increase in revenue to US$2.9b, attributable to a larger trading volume of jet fuel and higher average price recorded in 1Q12. The trading volume of jet fuel supply grew 11.1% yoy to 2.31m tonnes for 1Q 2012 and jet fuel prices averaged US$129.6/bbl compared with an average of US$114.2/bbl in 1Q11.
· Gross profit rose 15.4% yoy to US$13.6m compared with US$11.8m for 1Q11 due to higher gains from oil trading activities and the consolidation of contribution from the newly-acquired CAOHK. However, the share of profits from associates declined 10.5% yoy to US$11.2m for 1Q12 as Shanghai Pudong International Airport Aviation Fuel Supply Company Ltd (SPIA) recorded lower profit from smaller inventory appreciation.