• Stay BUY and SGD1.60 Target Price, 18% upside, 3.3% yield.
• We recently hosted CHINA AVIATION OIL(S) CORP LTD (SGX:G92)’s management for a non-deal roadshow (NDR) and came back feeling positive about the group’s long-term earnings growth prospects, aided by international passenger traffic growth recovery in China. This, along with passenger capacity increases at Shanghai Pudong International Airport (SPA) by late 2019, could lead to upside surprise to our profit estimates.

Expecting Gradual Growth in Aviation Traffic

• After witnessing some negative impact from the US-China trade war, China Aviation Oil now expects a gradual improvement in China’s international passenger traffic in 2019.
• Management also believes that a ramp up in jet fuel volumes for Shanghai Pudong International Airport Aviation Fuel Supply (SPIA) may take some time, especially with SPA’s capacity expansion to be completed by end-2019. This is in line with our estimates for growth in China Aviation Oil and SPIA’s jet fuel volume growth for 2019-2021.

Continues to Explore M&A Opportunities

• In 2018, China Aviation Oil acquired Navires Aviation (NAL) for USD8m. Although it was a small acquisition, NAL enabled the group to establish into-wing jet fuel supply systems at four European airports: Schiphol, Brussels, Frankfurt, and Stuttgart. This enhanced China Aviation Oil’s global reach.
• Management said its large net cash position of USD379m (c.40% of it market cap) enables the group to explore more global M&A opportunities, especially in developed countries where valuations are expected to be on the higher side.

Higher Dividends Not Totally Ruled Out

• China Aviation Oil reiterated that its dividend policy entails paying 30% of consolidated net profits as dividends to shareholders. Although there are no clear and immediate plans, it stated that the policy does provide scope for paying higher one-off dividends – subject to management and board approvals.

Still a BUY

• We remain bullish on China Aviation Oil’s share price outlook, amidst expectations of a revival in earnings growth towards end-2019. In addition, with a zero debt balance sheet and large net cash position, the group is well positioned to undertake an earnings-accretive acquisition, in our view.
• We maintain that its ex-cash 4.7x 2020F P/E remains compelling.

Source: RHB Invest Research - 3 May 2019