M&A likely for China Aviation Oil and Shanghai associate

CAO’s equity stake in SPIA could be worth US$995m as compared to its current market cap of US$1.01b.

RHB Research said it is confident of China Aviation Oil’s returns of earnings from its stake in Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), which is almost equal to the latter’s market capitalisation. SPIA, a 33% owned associate of CAO, offers aircraft refuelling services at Shanghai Airport.

RHB analyst Shekhar Jaiswa noted that SPIA’s contribution to CAO has increased from US$10m in 2008 to US$64m in 2017. “With upcoming capacity expansion at the Shanghai Airport, SPIA’s earnings could grow 13-15% during 2018-2019. SPIA’s business model is similar to Bangkok Aviation Fuel Services Pcl (BAFS TB, NR), which is listed on the Thai stock exchange and is currently trading at 24x P/E,” he added.

Moreover, even at a 30% discount to BAFS’ valuation, Jaiswa’s calculations show that CAO’s equity stake in SPIA could be worth US$995m as compared to its current market cap of US$1.01b.

With that, a large M&A is likely and may require capital raising. “As the jet fuel trading and supply business outside China is well-developed and competitive in nature, any M&A with meaningful earnings contribution would have to be large in size and would come at premium valuations,” the analyst said.

Jaiswa also noted that with only US$180m of net cash on the balance sheet, we assess that CAO may have to raise capital to fund a large M&A. “We believe CAO may tap the debt market soon as we see a likelihood of an M&A activity during 2H2018 or early 2019.”