SINGAPORE (June 11): RHB is reiterating its “buy” call on China Aviation Oil (CAO) with a target price of $1.60.
RHB remains upbeat on the long-term growth of China’s aviation passenger traffic, in line with its rising per capita income and expanding aviation infrastructure.
"We conservatively expect CAO’s near-term earnings to be driven by increasing jet fuel supply to China and more jet fuel being pumped by Shanghai Pudong International Airport (SPIA), which accounts for 65% of pre-tax profit," says analyst Shekhar Jaiswal in a Tuesday report.
RHB recently trimmed 2019-2020 Brent crude oil forecasts by about 3%. This downgrade is in line with the research house’s expectations of a prolonged US-China trade war, which will possibly lead to lower-than-expected global economic growth.
“We believe this will likely dampen global oil demand more than International Energy Agency’s (IEA) current estimate of 1.3mbpd additional demand for 2019,” adds Jaiswal. Hence, CAO’s FY19-20 earnings estimate saw about 2% adjustment.
Despite the cloudy oil price outlook, the analyst still remains confident on the growth in China’s aviation passenger traffic over 2019-2021.
With US-China trade war concerns in mind, the analyst is only forecasting mid-single digit jet fuel supply volume growth for the group in 2019, as compared to an average jet fuel supply volume growth of about 11% during the last 10 years.
Moreover, SPIA’s capacity expansion is expected to be completed by end-2019. This should enable SPIA Aviation Fuel Supply Company, which is 33%-owned by CAO, to see higher-than-estimated jet fuel volume growth in 2020-2021.
Currently, CAO has a zero debt balance sheet and large net cash position of about 46% of its market capitalisation.
“CAO could undertake an earningsaccretive acquisition, in our view. The group may even consider paying higher dividends, subject to management and board approvals, in case it is unable to grow inorganically,” says Jaiswal.
YTD, the stock has been outperforming the STI by about 20% and continues to trade at a compelling ex-cash FY20 price-to-earnings ratio of 4.3 times. This compares with an estimated FY20 earnings growth of 7.6%.
Hence, Jaiswal believes that the stock remains cheap compared to regional and global peers.
As at 11.45am, shares in CAO are trading 1.53% higher at $1.33 with a FY19 dividend yield of 3.4%.
