• China Aviation Oil has a very long history on the Singapore Exchange, having listed way back in 2001 and a few years later filing for bankruptcy on huge losses from speculative options trading. Soon after, it was resuscitated financially and led by a new board. 

• The Covid pandemic dealt a blow to its business which depends on aviation travel. With domestic and international travel picking up pace, CAO’s supply volume of jet fuel should rise accordingly.

Its business has been low in capex and high in cash generation, leading to a cashpile which is about 64% of its current market cap (S$787 m).

• However, margins are thin from operating a cost-plus model whereby it earns a fixed margin for every unit of fuel it supplies. Read more what Phillip Securities says below....

 

CAO overview3.23

• CAO supplies imported jet fuel to the civil aviation industry in China. CAO is 51.3%-owned by state-owned China National Aviation Fuel Group Limited, which holds the mandate to supply all jet fuel requirements in China.

• CAO also markets jet fuel to airports outside China, and engages in international trading of jet fuel and other oil products, as well as carbon credits.

• It has a 33% stake in Shanghai Pudong International Airport (SPIA). SPIA accounted for 62% of net profit in FY22.

 

CAO cashFY23Screenshot of a section of CAO's cashflow statement for 2023. The cashpile of US$373 m is the equivalent of S$505 million, or 64% of its current market cap (stock price: 91.5 cents).


Excerpts from Phillip Securities' report

Analyst: Peggy Mak

Lift-off in international flights

 The results beat our estimates by 22%, due to stronger-than-expected contributions from 33%-owned SPIA. 

CHINA AVIATION OIL

Share price: 
$0.91

Target: 
$1.05

 Net profit rebounded 75.5% due to
1) stronger demand for jet fuel with borders reopened from early 2023;
2) higher margin per metric ton with increased direct sales with airline customers; and
3) SPIA’s net profit jumping 61% YoY.

Net cash at year-end was US$373mn (S$0.623/sh). Full-year dividend was raised to 5.05 Sct (FY22: 1.6 Sct), a yield of 5.4%.

 China’s international air traffic is still at 37% below pre-Covid level. Flights are progressively being restored with further normalization of aviation services. China accounted for 62% of total revenue in FY23.

 Maintain BUY call and raised TP to DCF-derived TP to S$1.05 (prev. S$1.01).
We lifted our FY24e net profit estimates by 17% to factor in improved gross margin.

 

The Positives

 Gross profit per metric ton jumped to US$2.53 in FY23 (FY22 US$1.75/mt). The margin in 2H23 was 145% higher YoY at US$3.78/mt.

This was achieved through engaging in more end-to-end sales, sourcing products from refinery for delivery to the airline customers.


CAO profit2022
This is compared to the typical low-margin back to back oil trading transaction. Higher volume also helps to lower unit fixed cost.

 Contributions from 33%-owned associate Shanghai Pudong International Airport Aviation Fuel Supply Co Ltd (SPIA) grew 61% to US$31mn.

SPIA also paid US$23mn to CAO in FY23, 9.5% higher YoY.


We expect a higher payout in FY24e after the strong FY23. 
 

The Negative

Provided for impairment of US$12mn for goodwill (US$3.4mn) and investment in an associate (US$8.7mn), thus lowering net profit.
 

peggymak4.22Peggy Mak, research manager, Phillip SecuritiesOutlook

Volume is expected to continue to improve as China further restores bilateral flights that were cut during the pandemic.

Its US jet fuel supply operation would also benefit from resumption of US-China flights to 100 round-trips at end March.

Maintain BUY and raised DCF-derived TP to S$1.05 (WACC 15%, terminal growth 1%).

We have also lifted our FY24e net profit estimates by 17% to account for a higher profit per ton.


Full report here

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