China Aviation Oil (Part 2)

I previously wrote about how China Aviation Oil (CAO) offers value and growth at a price of SGD1.45 per share.

A recent history of SATS is a useful analogy for understanding CAO’s potential to become a successful and independent aviation fuel supplier.

SATS is a gateway services and food solutions provider that mainly serves the aviation industry and was once 80% owned by Singapore Airlines.

Although both companies operate in different parts of the aviation industry, I see a few similarities between SATS and CAO. Both companies derive 40-50% of their annual revenue from a single client and are trying to diversify by expanding into other Asia airports. Lastly, both companies have a conservative expansion strategy through either joint ventures or the purchase of minority investments.

In 2009, SATS was spun off from Singapore Airlines through an in-specie distribution. Since the spin-off, Singapore Airlines is still its single largest client (46% of fiscal 2017 revenue) while expanding into four other countries through joint ventures.

SATS’ overseas expansion strategy has been fruitful with the company consistently growing revenue and earnings over the 2009-18 period. Revenue grew at 6% per year while net profit expanded by 7% per year during this period. Meanwhile, ROE has grown from 10.5% in March 2009 to 16% as of March 2018. The share price has gone up by more than 2x during this period so long-term shareholders have been well rewarded.

SATS revenue and net profit growth

The SATS example suggests that CAO can maintain its 10-14% earnings growth if the company can execute well on its overseas expansion strategy.

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