RHB Group Research analyst Shekhar Jaiswal has maintained a “neutral” rating on China Aviation Oil (CAO) with an unchanged target price of $1.
Jaiswal’s continued neutral outlook on CAO comes amid the recent increase in the number of Covid-19 cases in China, which continues to be negative for the recovery in the country’s domestic and international aviation traffic.
This is especially so since China's National Health Commission (NHC) reiterated the significance of the country firmly sticking to its zero COVID-19 policy last Friday.
“While there has been some easing of Covid-19 guidelines, we believe the uncertainty over China Aviation Oil’s earnings recovery will overshadow its compelling valuation,” says the analyst in his March 21 report.
“From a low base of 2021, we expect CAO to report a 28% y-o-y profit growth each in FY2022-FY2023,” he adds. “Its FY2022 P/E is at 11x, implying an exciting 0.4x FY2022 price-to-earnings growth (PEG).”
However, the uncertainty around CAO being able to deliver such earnings growth remains elevated, says the analyst. “The company has been holding on to a net cash position (69% of its market cap) for a long while now and has failed to deliver any inorganic growth,” he says.
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Moreover, China had put over 45 million people under some form of lockdown as authorities sought to stamp out the country’s biggest pandemic spread in more than two years. “This has already started showing an impact on China’s aviation traffic, with domestic, international, and commercial aviation numbers at Shanghai Pudong International Airport (SPIA) trending lower y-o-y for the March 12-19 period,” Jaiswal says.
Some risks, according to the analyst, include China retaining its zero Covid-19 policy throughout 2022 and lower-than-expected margins for the trading business.
Shares in CAO are trading 0.5 cents up and 0.56% higher at 89 cents on March 21.
Photo: Bloomberg
