Analysts from DBS Group Research and RHB Group Research have maintained “buy” on China Aviation Oil (CAO) with higher target prices of $1.38 and $1.30 respectively, from $1.20 and $1.27 previously.
The upbeat recommendations come despite CAO’s 43.7% y-o-y decline in net profit of US$56.2 million ($72.4 million) for the FY2020 ended December, and 48.3% y-o-y lower revenue of US$10.52 billion posted on Feb 26.
Viewing the worst for the aviation sector as behind them, DBS analysts Paul Yong and Jason Sum are positive that CAO’s earnings look set to recover “firmly” in the next 12 months.
In fact, the analysts admit that their forecasts for the FY2021 and FY2022 are higher than consensus as they are more bullish on CAO’s earnings recovery trajectory.
CAO has been a beneficiary of the strong recovery in China’s domestic air traffic at the Shanghai Pudong International Airport (SPIA), where departing frequencies have increased to almost 70% of pre-Covid-19 levels in January 2021.
SEE:RHB maintains 'buy' on China Aviation Oil on positive news flow
As long as the pandemic remains under control in China, CAO’s earnings should improve “materially” from 2HFY2020 as SPIA, which is 33%-owned by CAO, accounts for more than half the group’s earnings, note Yong and Sum.
Beyond domestic recovery, the analysts are also buoyant on international air travel recovery as the Covid-19 vaccinations are being rolled out globally.
“CAO’s supply volumes should start to pick up more meaningfully from 2H21, assuming the vaccinations being rolled out now in key aviation markets will allow international flights to resume in greater numbers,” they write.
“Meanwhile, its trading business should continue to do well in a contango market for oil,” they add.
“We continue to see strong value for CAO at less than 3 times FY2021 ex-cash price-to-earnings (P/E), and its share price could re-rate even further if the company can make a significant earnings-accretive acquisition,” they write.
RHB analyst Shekhar Jaiswal is similarly positive on CAO amid strong domestic aviation traffic in China.
Jaiswal also anticipates a gradual recovery to take place on international aviation traffic in the later part of 2021.
“Normalisation of domestic aviation traffic - once travel restrictions placed for the Lunar New Year period are lifted - could be a near-term catalyst,” he says.
Like DBS’s Yong and Sum, Jaiwal also views CAO’s valuations as “compelling” despite its year-to-date share price outperformance.
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“CAO’s share price has appreciated by around 6% y-t-d, and outperformed the Straits Times Index (STI). Despite this, its FY2021 P/E of 10.6 times is below peers’, and implies only 0.5 times FY2021 price-earnings growth (PEG). On an ex-cash basis, the stock is trading at a compelling 6.7 times FY2021 P/E,” he notes.
While CAO’s net cash position of US$269 million, accounting for around 37% of its market cap, is a plus for the group, Jaiswal maintains that the group should use its large balance for an earnings accretive acquisition should the opportunity arise.
On this, he has increased his profit estimates for FY2022 to increase by 6% to account for the recovery in aviation traffic.
On the other hand, he has lowered his profit estimates for FY2021 by 5% as he expects CAO’s 49%-owned associate, TSN-PEKCL to sustain a “small loss” during the year.
As at 4.06pm, shares in CAO are trading 1 cent higher or 0.9% up at $1.13.
