SINGAPORE (July 7): RHB Securities is reiterating its “buy” call and target price on China Aviation Oil (CAO) at $1.25. This gives the counter a 4.5% 2020F yield and 23% upside from its $1.02 close on Friday (July 3), analyst Shekhar Jaiswal says in a July 6 note.
“We remain confident of China Aviation Oil’s return to earnings growth in 2021F,” he asserts.
“CAO’s 2021F P/E of 6.8x is below the range of multiples of its global jet fuel supplying peers, which are trading between 9.4x and 11.8x FY21F P/E. Accounting for its strong net cash position (c.60% of its market cap), CAO is trading at 2.7x 2021F P/E on an ex-cash basis”.
Jaiswal’s optimism stems from the gradual resumption of international flights and sustained recovery in domestic aviation traffic at the Shanghai Pudong Airport.
Citing data from the Airport, he quotes that passenger traffic in China rose 16% and 40% month-month in April and May following higher domestic traffic. Preliminary data for June indicates that 75% of China’s domestic flights were on schedule.
Meanwhile, a further lift is believed to come from the resumption of international travel to China, particularly via US-based airlines.
For now, Delta Air Lines resumed flights between Seattle and Shanghai in late June, while United Airlines has plans to resume twice-weekly flights between San Francisco and Shanghai on July 8.
“With domestic traffic expected to improve further in 3Q20, an increase in international traffic should translate into higher jet fuel volumes pumped by Shanghai Pudong International Airport Aviation Fuel Supply Co. (SPIA) in 2H20,” Jaiswal observes.
SPIA – which CAO has a 33% hold in – is the exclusive aircraft refuelling services provider at the Shanghai Pudong Airport. It accounts for 65% of CAO’s PBT.
Additionally, Jaiswal believes the recent rise in China’s jet fuel imports could also provide a boost to its cost-plus jet fuel supply business.
Collectively, he expects these moves to generate a 1H20 net profit of US22million – 28 million ($30.6 million - $39 million).
Barring a resurgence in Covid-19 infections, he has adjusted 2020 earnings by 2% to account for SPIA's 1Q20 jet fuel data.
As at 10.06am on Monday, shares of CAO was up a cent or 0.952% to $1.06.
