• Maintain BUY and SGD1.80 Target Price, 22% upside. 
• This under-researched stock is one of our Singapore Top Picks and we remain positive on its earnings growing again in 2018.
• China Aviation Oil (CAO) has acquired privately-owned UK-based jet fuel supply and trading outfit Navires Aviation (NAL) for ~USD8m. The latter has an interest in Aircraft Fuel Supply (AFS), a company that holds a concession from the Schiphol Airport Authority to manage jet fuel distribution – on behalf of its shareholders – to airlines at the airport.
• While the transaction is not expected to have any material impact on CAO’s 2018 earnings, it does provide the group with in-roads into the jet fuel supply business in Europe.
• Moreover, this acquisition indicates that the group is serious about growing its jet fuel trading and supply business beyond China.

China Aviation Oil (CAO) Has Acquired Navires Aviation (NAL)

China Aviation Oil (CAO) has acquired Navires Aviation (NAL) from Castleton Commodities Merchant Trading (CCMT), a wholly-owned subsidiary of Castleton Commodities International.

Navires Aviation (NAL) is a company limited by shares registered in England and Wales with principal activities in jet fuel supply and trading. It also undertakes aviation marketing activities. NAL has an interest in Aircraft Fuel Supply (AFS), a company incorporated in the Netherlands that holds the concession rights – issued by the Schiphol Aircraft Authority – to supply jet fuel at Schiphol Airport.

CAO is paying USD8m for the shares in NAL – and its interests in AFS – along with all of its jet fuel-related assets. The acquisition is to be funded through internal resources. However, CAO did state the final purchase price is subject to post-acquisition adjustments, as set out in the definitive agreement entered into between the group and CCMT.

What Are Potential Synergies?

NAL has an established comprehensive jet fuel supply system with critical supply chain contracts in Europe. This enables the firm to facilitate the sale of jet fuel to local and international airlines at Schiphol Airport, as well as airports in Frankfurt, Brussels and Stuttgart.

Through the acquisition, we believe CAO will be able to grow its operational capabilities, boost its jet fuel supply and trading portfolio, and strengthen the group’s foothold in Europe’s aviation market.

It is likely to do so by leveraging on NAL’s jet fuel supply network and operations backbone to drive the aviation marketing business in the Amsterdam-Rotterdam-Antwerp region and beyond.

Near-term Growth to be Driven by Shanghai Pudong International Airport Aviation Fuel Supply (SPIA)

33%-owned associate Shanghai Pudong International Airport Aviation Fuel Supply (SPIA) – which offers aircraft refuelling services at Shanghai Airport – witnessed a 46% growth in earnings to USD18.9m in 1Q18. This associate accounted for 70% of CAO’s PBT in 2017.

With upcoming capacity expansion at Shanghai Airport, we maintain that SPIA should continue to register strong growth over next few years.

SPIA’s Business Model Is Similar to Bangkok Aviation Fuel Services

SPIA’s business model is similar to Bangkok Aviation Fuel Services, which is listed on the SET and is currently trading at 20x P/E. Even at a 30% discount to Bangkok Aviation Fuel Services’ valuation, CAO’s equity stake in SPIA could be worth USD900m vis-à-vis its current market cap of USD939m.

Maintain BUY and SGD1.80 Target Price

Maintain BUY and SGD1.80 Target Price, 22% upside, as we remain bullish on China Aviation Oil (CAO)’s share price outlook. This is because the group is still on track to deliver steady earnings growth in 2018 after a weak 2017.

We expect it to book an estimated 15% y-o-y growth in EPS in 2018, implying 0.65x 2018F PEG – this makes the stock a compelling investment.

Source: RHB Invest Research - 02 Jul 2018