SINGAPORE (May 12): RHB Group Research is reiterating its “buy” recommendation on China Aviation Oil (CAO) with a target price of $1.25, as the company remains a good proxy to the Chinese aviation industry.
In a Tuesday report, analyst Shekhar Jaiswal says, “We hosted management for a tele-non-deal roadshow (NDR) and came back feeling positive about its earnings revival from 4Q20 – aided by gradual improvements in China’s domestic aviation traffic. CAO’s monopolistic position there and cost-plus business model should continue to ensure positive FCF generation.”
As the Covid-19 situation improves in China, there is scope for an earlier-than-expected recovery in domestic aviation traffic. Aviation regulator Civil Aviation Administration of China noted m-o-m improvement in April aviation traffic.
Shanghai Pudong International Airport Aviation Fuel Supply (SPIA), the exclusive aircraft refuelling services provider at Shanghai Pudong International Airport (SPA), could report higher 2H20 jet fuel volumes, as 50% of its traffic are domestic flights. SPA recently completed the expansion of a new runway, which could be used to further boost domestic traffic. SPIA, which is 33% owned by CAO, accounts for 65% of its PBT.
“Historically, CAO’s trading volumes for other oil products have been quite volatile. However, current contago prices for most oil products offer excellent opportunity for it to grow trading volumes,” says Jaiswal.
Moreover, CAO reiterated that 90% of its trades are for physical commodities and back to back in nature. Amidst elevated price volatility, it foresees defaults by counterparties as the biggest source of risk in the trading business and continues to follow strong risk management measures.
Management also highlighted that it did not have any exposure to troubled commodity traders Hin Leong or ZenRock.
Meanwhile, CAO has historically paid 30% of its earnings as dividends. In line with growing profits, its DPS has seen a steady rise since 2011.
“However, amidst expectations of weak earnings from its core jet fuel supply business in China and lower SPIA contributions, we believe CAO could pay 3.9 cents DPS in 2020 (2019: 4.7 cents) while maintaining the 30% payout ratio. This translates into a 4% FY21 dividend yield,” says Jaiswal.
With a strong net cash position of about 60% of its market cap, CAO is also at a good position to undertake earnings-accretive acquisitions, especially now that valuations for target companies are more reasonable.
As at 12.40pm, shares in CAO are trading at $1.01 or 0.7 times FY20 book with a dividend yield of 4.5%.
