Excerpts from analyst's report

RHB Research analyst: Edison Chen

cao planeCAO: The largest purchaser of jet fuel in the Asia Pacific region and the key supplier of imported jet fuel to the PRC’s civil aviation industry, and accounts for more than 90% of PRC's jet fuel imports. Photo: CAO (Singapore)
Our view that CAO would continue to fly high unperturbed by oil price fluctuation is vindicated by its organic growth from both domestic and overseas businesses. The company also looks to accelerate its growth through synergistic M&As, funded by its robust FCF and net cash hoard.

Maintain BUY with a higher DCFE-based SGD1.28 TP (9.5% CoE, 2% TG), implying 11.8x FY16 P/E.  

Jet fuel imports surge with China’s fuel price floor. In Jan 2016, China implemented a price floor (a USD40/bbl “as if” scenario) for domestic fuel sales and thanks to this price floor, China Aviation Oil Singapore (CAO) has seen and would continue to see jet fuel imports surge.

Combined with the organic growth of China’s aviation hub and positive catalysts (eg Shanghai Disneyland on volume from Shanghai Pudong International Airport Aviation Fuel Supply Corp (SPIA)), we remain positive on CAO’s domestic business and associates.

Overseas expansion faring well. CAO’s overseas expansion continues to fare well as overseas supply volume rose 32% YoY to 1.77m tonnes and the number of overseas airports increased to 38 (2014: 34). 

edisonchen1.16Strong FCF and cash hoard of USD170m to fuel inorganic growth. Backed by an adjusted FCF (to include associates dividends) of USD89.1m generated in 2015 and net cash hoard of USD170m (~45% market cap), CAO can easily acquire USD500m worth of downstream jet fuel assets without raising any equity. Through earnings-accretive acquisitions, CAO aims to surpass the USD100m profit milestone by 2020.

-- Edison Chen (photo)

Business volume for its American subsidiary, North American Fuel Corp (NAFCO) doubled while CAO Europe’s profit surged 316% YoY. 

In view of the brightening outlook, we raise our FY16 and FY17 earnings forecasts by 8.9% and 8% respectively.

250% profit surprise and dividends of SGD0.03. Despite weak macroeconomic conditions, CAO gave us a pleasant surprise on the upside with 4Q15 profit beating our USD4.5m estimate by 250%.

CAO also announced dividends of SGD0.03, a 50% YoY increase as the group moves to a growth-based dividend payout formula (30% of net profit).

Full report here.

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