Valuation
· Upgrade to BUY with a higher target price of S$1.30. We believe optimisation of the trading segment and an increase in strategic acquisition seem to be bearing fruit with a 43.6% jump in gross profit.
· We derive our target price at the average fair value suggested by our dividend discounted cashflow model and the PE valuation model pegged to its 3 year average PE of 11.0x.
1Q13 Results
· CAO reported a stronger-than-expected set of results for 1Q13 as net profit grew 5.3% yoy to US$21.5m due to improved gross profit despite weaker contribution from its subsidiaries. Total revenue rose 30.2% to US$3.8b on increased trading activities in jet fuel (+18.2% to 2.6m tonnes) and petrochemicals, fuel oil and gasoil (+95.2% to 1.2m tonnes).
· Gross profit grew by 43.6% to US19.5mattributable to higher trading gains from other oil products. However, share of profits from associates were lower compared to the last corresponding period at US$8.2m (-26.9% yoy), mainly due to the share of loss of US$2.9m from mark-to-market foreign currency swap contracts denominated in Korea Won against US dollar.
· As at 31 Mar 13, the company had a net asset value of US$0.67 or S$0.82 per share.
Earnings revision
· We increase our 2013 revenue and net profit forecasts by 20.0% and 15.1% respectively to account for the higher-than-expected earnings from trading of petrochemicals. The group has also set up an ambitious target of doubling its net profit by 2020, a CAGR of 9%.
Our View
· A business model often misunderstood. CAO supplies approximately 6m-7m tonnes of jet fuel toChina annually (under supply contracts) and makes a fixed spread gross profit on it. When trading opportunities arise in the open market, traders can lock in profits and book it under trading gains. With such business advantage, CAO is unlikely to book an operational loss on its jet fuel supply business.
· However, in the near term, contributions from its 30%-owned subsidiary SPIA is likely to be impacted from inventories revaluation due to the 10% decline in global jet fuel since March. We estimate that every US$1 drop in fuel prices will shave off US$0.8m of SPIA’s gross profit. CAO’s share price has also retraced 15% from the high and we believe this is a good level for investors to accumulate.
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