China’s aviation traffic is expected to improve over the next 12 to 24 months, and China Aviation Oil (CAO) is expected to record y-o-y earnings recovery, says RHB Group Research analyst Shekhar Jaiswal. That said, Jaiswal is lowering 2021-2023 estimates by 4-5% as traffic and jet fuel prices track below estimates.
In a June 28 note, Jaiswal is maintaining his “buy” call on the Chinese jet fuel supplier, with a lowered target price of $1.26 from $1.30 earlier, which represents a 20% upside.
“We have marked to market jet fuel prices and have adjusted our estimates to reflect the 1HF2021 aviation traffic in China and at Shanghai Pudong International Airport (SPA). We lower our 2021-23 estimates by 4-5% as China’s YTD aviation traffic and the spread between jet fuel and Brent crude prices is tracking below our estimates,” writes Jaiswal.
See: 'Buy' CAO on compelling valuation, near-term surge in China’s domestic travel: RHB
CAO supplies jet fuel to foreign and domestic airlines flying through Chinese and international airports. The company also trades in other oil products, such as fuel oil and gas oil. Its state-owned parent is the Asia Pacific’s largest physical jet fuel trader and sole supplier of imported jet fuel for China’s civil aviation market.
Jaiswal had expected the jet fuel crack (difference between Brent crude oil price and the jet fuel price) to gradually rise in 2021 amid higher demand for jet fuel, as aviation traffic not only recovers but grows in key countries with large domestic aviation market.
“While the jet fuel crack expanded in 1H2021 to US$1.10/barrel vs US$0.90/barrel in 2H2020, it remained well below the US$4.60/barrel jet fuel crack seen in 1H2020,” he writes. “Implied annualised flight traffic at SPA, based on first five months of data, is tracking 9% below our estimate.”
However, China’s domestic aviation traffic remains strong. According to the flight-tracking website, RadarBox.com, China is seeing more than 10,000 domestic flights a day. Across the week of June 18 to 25, the 7-day average was 10,443 daily flights. In the same week last year, the 7-day average was 8,062 daily flights. In 2019, the 7-day average was 9,828 daily flights.
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Thus, Jaiswal remains confident of recovery in aviation traffic growth. “While the slow and uneven vaccination across the world and especially in Asia could delay the recovery in China’s international aviation traffic, we remain optimistic on a sustained air traffic recovery in China during the next 12-24 months. We have lowered the growth in China’s jet fuel supply and trading volumes in 2021 to 15% from 20%.”
Despite lowering of growth estimates, CAO’s 10.3x 2021F price-to-earnings ratio (P/E) is below peers’ and implies only 0.6x 2021F price/earnings-to-growth ratio (PEG). The company’s net cash position stands at US$269 million, accounting for approximately 40% of its market cap. On an ex-cash basis, the stock is trading at a compelling 6.1x 2021F P/E.
As at 1.13pm, shares in CAO are trading 1 cent higher, or 0.95% up, at $1.06.
