China Aviation Oil: Holding the ship steady

Record tonnage of jet fuel handled. In the year to Dec 08, CAO’s revenue grew 81.4% to US$5.25b while earnings slumped 77.1% to S$38.3m, which was ahead of our expectations. FY07 benefited from a S$160.2m exceptional gain. The sales surge was mainly due to the spike in demand for jet fuel during the Olympics and overall growth in aviation traffic in FY08. The Group handled and supplied a record 5.2m metric tonnes of jet fuel in FY08, 23% higher than a year ago.

SPIA loss was the dampener. CAO, with a 32.5% shareholding of SPIAFSC, saw attributable losses of around US$10.2m as the latter was caught out with excessive inventory. The situation was exacerbated by falling jet fuel prices.

YoY performance still commendable. Doing a simple comparison between FY07 and FY08, we focus on the Group’s PBT line. After stripping out the extraordinary items (divestment gain of US$160.2m, one-off finance charges of US$6.7m related to accelerated amortisation and full settlement in deferred debt), we attain a PBT of US$28.8m. This implies that there was still decent growth of 16.3% from FY08, where PBT came in at US$33.5m.

Petrochemicals trading. This segment started this business in end-08 and management does not expect this to contribute significantly to the Group’s bottom line. CAO has to abide by stringent risk management guidelines and parameters. We forecast this business segment to contribute not more than US$5m annually for FY09 and FY10.

Key management meeting takeaways. Despite a substantial loss-contribution from SPIAFSC for 4Q08, management emphasised the long term importance of this asset and suggested that it would be keen to increase its shareholding if given the opportunity. Given the tough operating environment, management think it is unlikely for new asset injections for the time being. Their primary goal is to make sure that CAO treads carefully through the stormy waters ahead. Valuation and recommendation. Based on our DCF methodology, our target price has inched up from S$0.65 to S$0.665, which represents an upside of 7.3% from current levels. Upgrade to NEUTRAL.

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