SINGAPORE (Mar 1): RHB Research is remaining “neutral” on China Aviation Oil (CAO) after the group reported FY18 earnings of US$94 million ($127 million), up 10% y-o-y and coming in slightly ahead of RHB and consensus estimates on better-than-expected gross profit margin.
The research house has raised its target price on the stock to $1.50 from $1.32 previously as it rolls over its blended valuation to 2019, which implies 9% upside and 4% FY19F yield.
In a Friday report, analyst Shekhar Jaiswal notes that CAO’s sharp recovery in share price -- having delivered 29% returns in 2019 and outperforming the Straits Times Index (STI) by 25% -- has brought the stock’s forward P/BV, P/E and dividend yield close to their respective three-year average values.
As such, analyst has raised 2019-2020 profit estimates by 3% and introduced 2021 estimates.
Jaiswal however believes a further-rerating would require a stronger recovery in earnings -- aided by higher jet fuel supply volumes at Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), CAO’s 33%-owned associate, on top of better-than-estimated margins for the group’s core jet fuel supply and trading business.
“Growth in volume for supply of jet fuel into China (a cost plus business); higher profit contribution from SPIA; and small but maiden full year contribution from recently acquired European business should support 2.5% profit growth in 2019F,” says Jaiswal.
“Our discussion with CAO seems to suggest that the new management team has aligned its focus on achieving profitability over registering volume growth, and growing external business – i.e. reducing dependence on its sister concerns to support an increase in jet fuel supply and trading volumes,” he adds.
Shares in CAO last traded 2 cents lower at $1.35 before the midday trading break, which is at 1.08 times FY19F book value.
