Strikes agreement with oil major. In another announcement, CAO revealed that it had entered into a cooperation framework agreement with China National Offshore Oil Cooperation Marketing Company (CNOOC) that would last till 31 Dec 2012. The agreement states that CAO should eventually be able to expand its jet fuel supply and trading business beyond the PRC, mainly by selling oil and petrochemical products in the international market. We have not factored in any tangible gains for CAO in our revised forecasts as yet for this new development, as the initial agreement only entails CAO purchasing CNOOC's jet fuel at the Huizhou Refinery.
Lowering forecast. We have lowered CAO's forecasted associate contribution for FY09 by 22.5% from US$13.3m to US$10.3m. This is mainly due to our lower crude oil assumption of US$51/bbl, as well as 1Q09 being loss-making. However, we have increased our FY10 associate contribution estimate by 44.3%, from US$14.2m to US$20.5m. This is on the back of a higher crude price target of US$58/bbl for FY10 assuming it does not get caught out again by higher procurement costs of inventory amid falling oil prices.
Valuation and recommendation. Our EPS estimate has been reduced by 27.1% from 5.9S¢ to 4.3S¢ in FY09, but been raised by 11.9% from 5.9S¢ to 6.6S¢ in FY10 after our adjustments. At CAO's closing price yesterday, the stock is trading at 21.2x FY09 and 14.0x FY10 P/E, which appears to be quite rich. We have updated our DCF parameters and set a required return from the market of 15.0%, in line with other S-shares we cover. Our target price has been raised from S$0.665 to S$0.72, but we downgrade the stock to a SELL given the stock's strong run-up over the past month.
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