Post-restructuring story. China Aviation Oil (CAO) was brought to its knees by rogue trading of
jet fuel derivatives that amounted to more than US$550m in losses in 2005, but was given a new
lease of life in 2006 through restructuring and a subsequent re-listing. Since then, it had totally
done away with its trading arm and focused on its core business activities, which are mainly the
jet fuel procurement business and investments in complementary businesses.
A gradual swing towards synergistic strategies. As time passed after its re-listing and
subsequent stability in its operations, management realised the importance of streamlining the
business towards more value-adding activities by cutting out irrelevant or non-related investments
and concentrating on business targets that would complement its business-chain, be it going
upstream or downstream. This is evident when the Group disposed of its 5% stake in Compania
Logistica de Hidrocarburos, S.A (a Spanish logistics company) during 1H07, and purchased a
49% stake in the Beijing – Tianjin oil pipeline that should be completed by Jan 09.
Re-visiting trading and hedging activities. The Group announced about six weeks ago that it
will resume its petrochemicals trading business from 4Q08 onwards. Products traded will be
substances such as Benzene, Styrene and Toluene through the inheritance of BP’s Asian
petrochemicals and trading team. The Group also recorded a gain of S$4.8m on a close-out of a
swap deal backed by underlying physical cargo (jet fuel) with a customer in 2Q08. Management
has stressed that such activities are all carried out with the strictest supervision of its newly
established risk-management committee.
Overall business direction. Any expansion of its current operations will revolve around its three
main business segments: 1) Jet fuel supply & trading. 2) Oil-related assets. 3) Trading of other oil
products.
Valuation. We derive a 12-month fair-value target price of S$0.705 using our DCF model,
applying a WACC of 14.8%, a beta of 1.2 and a terminal growth rate of 1%. At the last traded
price, the stock is trading at 6.8x FY08 and 7.9x FY09 P/E, offering a yield of 4.8% and 1.1x P/B.
source:DMG
The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned
To my beloved friend CW8888
1 year ago
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