SINGAPORE (July 28): UOB Kay Hian is maintaining its “buy” call and target price of $2.26 for China Aviation Oil (CAO), leaving its 2017-2019 forecasts unchanged as the group yesterday delivered its 2Q results in line with expectations.
See: China Aviation Oil 2Q earnings up 4% at $33.4 mil on higher revenue
In a Friday report, analyst Edison Chen observes how there was some slight negative impact on the group’s associate performance over the quarter due to the renminbi moving weaker against the US dollar, which led to associate contributions dropping 5.5% to US$18.3 million to offset overall gains from other associates.
Nonetheless, Chen believes the group’s 33%-owned associate SPIA, an exclusive refueller, to continue generating strong recurring income for the group with growth rates of around 7% in renminbi terms, thanks to its strong fundamentals such as Shanghai’s importance as a global business hub, and a likely rise in refuelling volumes.
This is particularly so as the Shanghai builds a new terminal aimed at becoming among the world’s top three busiest airports in 2017, and as China experiences a civil aviation boom, adds the analyst, who remains cognisant of the risk that there could still be negative impact to CAO’s profits from factors such as the continued weakening of the renminbi, or a drop in oil prices.
“With oil prices no longer in reversal and hence a lack of inventory gains, we do not think the exceptional profit growth seen in 2016 will repeat itself in 2017. Instead, we are expecting a flattish slight profit growth in the single digits,” says Chen.
Conversely, a steeper jet fuel future contango market is likely to enhance trading profits, while any merger and acquisition (M&A) announcements on earnings-accretive fuel assets will also likely result in share price reviews for CAO, he adds.
As at 3:09pm, shares of CAO are down by 3 cents at $1.64.
