Results at a glance
CAO is expanding its business and improving profitability. In view of higher working capital (which could lead to declining or even negative CFOs), we think that PER is a more appropriate valuation method. Based on the average forward PER of 14.2x from its peers and an estimated FY16 EPS of US$10.1 cents (S$13.5 cents), we derived a higher TP of S$1.92 and upgrade our rating to Buy.
Low oil price fueled aviation sector boom, benefiting aviation fueling business correspondingly
CAO performed outstandingly in 1H16 with mid double-digit growth in gross, operating, and net profit, albeit the top line dipped slightly. Riding on the growth of global civil aviation traffic, CAO’s jet fuel supply has been experiencing strong demand, especially in China market. The jet fuel supply and trading volume increased by 11.77% yoy to 6.74mn tonnes in 1H16, which offset the 49.8% yoy decrease in jet fuel price. As a result, the revenue dropped moderately by 16.6% yoy to US$3,247.3mn in 1H16.
Figure 1. Revenue and volume of jet fuel supply and trading
Source: Company, PSR
According to China Aviation Administration of China (CAAC), the revenue passenger kilometer (RPK) in China increased by 14.5% yoy to 331.5 bn persons kilometer from Jan-16 to May-16, together with 10.7% yoy increase in passenger during the same period. Referring to Figure 2 and 3, not only the China air traffic is trending up, but global air passenger volume is also on an upward trajectory. International Air Transport Association (IATA) reported a 6% yoy RPK growth in the first 5 months. Since China is still the biggest market for CAO, we expect that the jet fuel trading volume will grow by 13% in FY16.
Figure 2. China RPK and passenger traffic
Source: CAAC, PSR
Figure 3. Air passenger volumes
Source: IATA Economic, IATA Monthly Statistics
Gains from other oil products trading surged, proving the success of product mix diversification
In 1H16, the revenue contributed by the oil product trading segment amounted to US$1,240.3mn with 74.1% yoy up. The high double-digit growth was attributable to the 154.2% yoy increase in trading volume which reach 6.89mn tonnes. The segment mainly engage in fuel oil and gas oil trading, with fuel oil being the major revenue generator. Referring to Figure 4 and 5, according to Joint Organizations Data Initiate, the import and export volumes of fuel oil in Singapore improved in the first 4 month this year, and are hovering above their 5-year averages. Riding on the upward momentum, we expect CAO to see stronger growth in fuel oil trading in Singapore in the foreseeable future.
Figure 4. Revenue and volume of other oil products
Source: Company, PSR
Figure 5. Singapore fuel oil import (kbbl)
Source: Jodi, PSR
Figure 6. Singapore fuel oil export (kbbl)
Source: Jodi, PSR
Investments in associates and joint ventures enhance the profitability substantially
SPIA’s shared profit boosted by 41.4% yoy, amounting to US$29.6mn. The substantial increment was mainly due to higher refueling volume and profit margin which resulted from the oil price recovery in 1H16. Due to higher operating profit from storage leasing activities, profit from OKCY, with the largest growth of 275.8% yoy, amounted to US$2.5mn during the same period. Though Xinyuan’s profit declined, as well as CNAF HKR made further loss, the overall investment portfolio is still robust and should see higher growth in 2H16.
Medium-term catalyst: China government plans to build more than 500 airports by 2020
The State Council guided that China will have more than 500 general aviation airports in major agricultural areas, major forest regions, and over 50% of 5A tourist scenic spots by 2020. At the same time, it also further opens up lower altitude airspace for civilian use. Since CAO has been actively seeking expansionary deployment in oil-related fields, this could pose a good opportunity for the Group to widen its jet-fuel supply networks as well as to increase its equity investment. We think that its monopolistic position of CAO and its parent company CNAF could give it an edge in gaining market share.
CAO will leverage on the low oil price period and lift the trading volume of both jet fuel and other transportation fuels, hence it is expected to increase its working capital expenditures. Therefore the discounted FCFE model applied previously was not suitable given the FCFE will decline or even be negative in the near future. Now we change to PE model which is more applicable.
We use World Fuel Services, Bangkok Aviation Fuel, and San-Ai Oil as peers. World fuel Services is a global transportation fuels provider, which is a goal CAO aims to achieve. The rest of the companies are single region fuel providers.
Based on our FY16e EPS of US$10.1 cents (S$13.5 cents) and the average forward PER of 14.2x, we derived a higher TP of SG$1.92 and upgrade to Buy.