Peggy Mak of PhillipCapital has initiated coverage of China Aviation Oil with a "buy" call and $1.01 target price, on the premise that this company will see its earnings double over the next two years.
CAO, a government-linked company, serves the aviation industry of China. Besides its key base in Shanghai, CAO is involved in the trading of jet fuel, other oil products as well as carbon credit.
In her Oct 30 note, Mak points out that international passenger traffic in China, as of Sept, is up 18-fold year to date and has only reached 33% of pre-pandemic levels.
"We expect international travel volume recovery to gain pace in FY2024, fuelling demand for jet fuel at international airports," says Mak.
She notes that China’s jet fuel consumption has risen by CAGR of 8.4% over the last 10 years. "More airports have been added over the years to cope with the rise in air travel demand. We think CAO could potentially expand its footprint to international airports in other Chinese cities," says Mak.
As at end of 2022, CAO held net cash of around US$308 million, which is equivalent to nearly two-thirds of its current market cap.
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Using a discounted cash flow model, Mak values the stock at $1.01.
