Wednesday, May 27, 2009

China Aviation Oil - Overvalued by DMG Partners (26 May 09)

1Q09 Results Review

1Q09 results within expectations. CAO reported revenue of US$655.6m for 1Q09, down 34.8% YoY. This was on the back of lower jet fuel prices, which fell 47.3% YoY. However, the volume of jet fuel procured and supplied, alongside international trading increased by 0.3m tonnes YoY. NPAT also fell 54.6% YoY to US$4.1m for 1Q09, exacerbated by a US$2.6m loss from its associate SPIAFSC.

1Q09 gross profit outstanding. The Group registered a 223.5% YoY increase in gross profit for 1Q09 to US$10.2m. This was due to the addition of new business segments, namely jet fuel trading activities, freight optimisation and hedging activities. We stress however that this increase in gross profit is not sustainable as we estimate around US$5m out of the US$10.2m was contributed by trading activities. Stripping this estimated trading profit would have brought the Group’s bottom line to a loss of around US$1m.

Changes to forecasts. Our new FY09 EPS estimate has increased 30.2% to 5.6S¢, due to our assumption of higher trading activity gains (S$5.0m versus S$3.0m previously) and increasing the spread per barrel (US40¢ versus US35¢ previously for FY09 and FY10) under its Jet Fuel Procurement and Supply segment. Our FY10 EPS estimate also increased by 5.1% from US6.6¢ previously to US6.9¢ as a result. We have retained our crude oil forecasts at US$51/bbl for FY09 and US$58/bbl for FY10.

Lack of a compelling story. We have updated our DCF model and lowered our required return on the market to 12.0% (from 15.0% previously) to account for an improvement in market sentiment, liquidity and risk aversion. Without further news of any asset injections, CAO’s lacks a clear selling point. With the recent addition of the Tianjin – Beijing Oil Pipeline, we do not foresee any further asset injections in the medium to long term.

Valuation stretched. According to our estimates, the stock currently trades at 22.9x FY09 and 18.3x FY10 P/E (versus 7.7x FY09 and 6.0x FY10 P/E for the FTSE ST China Index), which in our view is rich considering the lack of any strong growth drivers. Maintain SELL with a fair value of S$0.96.

No comments:

Related Posts Plugin for WordPress, Blogger...

My Blog List