Analysts from DBS Group Research and RHB Group Research have kept “buy” on China Aviation Oil (CAO) on its attractive valuation. The analysts also see the group making an eventual recovery amid the global roll-out on vaccinations.
That said, analysts from both brokerages have lowered their target price estimates on CAO to $1.20 from $1.38 and $1.26 from DBS and RHB respectively.
The lower target price estimates came as CAO’s earnings for the 1HFY2021 stood below expectations, at 30% of DBS analyst Jason Sum’s full-year estimates, and at 40% of RHB analyst Shekhar Jaiswal’s estimates.
DBS’s Sum has reasoned that the group’s lower-than-expected earnings was due to “steepening backwardation in crude oil market and sluggish resumption of international flights”.
His lower target price of $1.20 is based on 11.0 times blended earnings from the FY2021 and FY2022, which is at +1.0 standard deviation (s.d.) above its five-year mean.
See also: China air traffic to improve, but RHB lowers estimates on China Aviation Oil
However, he deems CAO’s valuation – which is currently priced at 0.8 times price-to-book value (P/BV) – as undemanding.
“Over the past five years, the stock traded at an average of 1.5 times price-to-book value (P/BV) against an average quarterly trailing return on equity (ROE) of 12.5%,” he writes.
“There are limited listed comparables to CAO, given its niche business model. Based on available information, CAO is trading at a discount to most peers, at 10.5 times price-to-earnings or P/E (FY21F), as compared to the peer average of 15.5 times. Dividend yield wise, CAO's FY2021 dividend yield of 3.2% is slightly below the sector average of 4.3%,” he adds.
In addition to the lower target price, Sum has also cut his net profit estimates for the FY2021 and FY2022 by 26% and 13% respectively.
That said, the brokerage’s earnings forecasts for the FY2021 and FY2022 are slightly higher than the rest of the consensus as it is more bullish on CAO’s recovery trajectory as well as the recovery of its key associate, SPIA.
On the other hand, “a sustained weaker demand for international air travel would negatively impact CAO’s revenue and earnings. A sharp drop in oil prices would lead to mark-to-market losses for its key associate SPIA, which would impact its contribution to CAO.”
“CAO's earnings could also be affected if either its associate SPIA ceases to become the sole jet fuel refueler at Shanghai Pudong International Airport or if more parties are allowed to supply bonded jet fuel into China,” says Sum.
RHB’s Jaiswal has also cut his earnings estimates on CAO for the FY2021 to FY2023 by 3% to 12%.
“The recent spike in Covid-19 cases in China would cap further improvements in domestic aviation traffic, while the eventual recovery in international aviation traffic will now be only visible in 2022,” he reasons.
“In China, amidst a rise in Covid-19 cases, the 7-day traffic average for commercial flights has now dropped below 2019 and 2020 levels. We now expect 2HFY2021 earnings grow by a modest 2% y-o-y, as we expect some improvement in GPM. While we now expect 2022 profit to grow by 32% y-o-y to US$76 million, we maintain our view that a return to pre-pandemic earnings could take two to three years, in line with the anticipated recovery in global aviation traffic.”
Like Sum, Jaiswal also deems CAO’s valuations as “compelling”, with the stock now trading at 0.3 times FY2022 price-to-earnings growth (PEG) and at 4.7 times FY2022 P/E on an ex-cash basis.
On July 30, CAO posted earnings of US$24.3 million ($32.8 million) for the 1HFY2021 ended June, 3.04% higher than earnings of US$23.6 million in the same period the year before.
Revenue for the period grew 61.6% y-o-y to US$8.68 billion due primarily to higher oil prices and an increase in the total supply and trading volume.
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Gross profit fell 31.35% y-o-y to US$15.7 million due to lower gains from trading and optimisation activities and CAO’s jet fuel supply business.
Earnings per share (EPS) for the period was 2.82 US cents compared to 2.74 US cents in the 1HFY2020.
As at 3.24pm, shares in CAO are trading 1 cent lower or 1.01% down at 98.5 cents, or 0.7 times FY2021 P/B with a dividend yield of 2.5%, according to RHB’s estimates.
