Excerpts from UOB Kay Hian's report

Analyst: Edison Chen

cao planeCAO owns a 33% stake in SPIA, the sole supplier of jet fuel for the second largest airport in the PRC – Shanghai Pudong International Airport. Photo: CAOAs CAO reports and receives revenue in US$ but remains listed in S$, it benefits significantly from the rising strength of the US$ (up 8.2% since Jun 16). We raise our 2016 estimate by 7.5%, given that the intact contango oil market is delivering free profits.

However, we opine that these factors have yet to be priced in as trading has been sideways, but this will change once CAO reports record-breaking results in Feb 17. Maintain BUY with target price raised to S$2.01.


China Aviation Oil
Share price: 
$1.40
Target price: 
$2.01

Oil price trending up with contango spread intact. Following the OPEC’s recent deal, oil prices have been trending up again with the contango spread (between the current spot price and the futures price), in line with the market’s optimistic view towards future oil prices. Compared with Jun 16 where the one-year contango was at about US$2.00-3.00, the one-year contango had reached about US$4.00-5.00 in Dec 16.

Oil price contango delivers free profits to CAO. Oil distributors benefit immensely from an oil price contango environment as they are able to buy oil immediately at a lower price while arranging for deliveries at a later date and higher prices. This macro tailwind is expected to give CAO’s trading profits a fairly significant boost.

Forecast: US$80.6 m record profit
edisonchen1.16"We believe that these factors will be reflected once CAO delivers record-breaking annual results in Feb 17. Its most comparable peer, Bangkok Aviation (BAFS TB) is trading at 22.2x historical PE vs CAO’s 10x. We would also like to highlight that CAO boasts a net cash balance of US$203m (24.2% of market cap) and 2017 yield of 3.2%."

-- Analyst Edison Chen 

US$ strength and oil price contango yet to be priced in. We expect CAO to benefit from US dollar strength and optimism towards oil prices, but it appears that the market has yet to price in these factors in as the share has largely been trading sideways.

Maintain BUY and we raise our target price to S$2.01 based on 14.4x 2017F PE on the back of our projection of the US$/S$ exchange rate rising to1.48 by end-17, pegged at a 20% discount to peers’ average PE of 18x.

2014 2015 2016F 2017F 2018F
Net turnover (US$m) 17,061.0 8,987.5 9,203.1 10,426.1 11,947.4
Net profit (US$m) 49.2 61.3 80.6 81.2 89.0
PE 16.5 13.3 10.1 10.0 9.1

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