China Aviation Oil (CAO) was hit by a negative surprise on 28 July as it was served a writ of summons from Banque De Commerce Et De Placements SA, DIFC Branch. Still, CGS-CIMB analyst Cezzane See has maintained her “hold” call on the stock due to CAO’s strong cash position, which could cover the cost of a legal settlement. While she raised her target price slightly from 85.8 cents to 87 cents, growth is only expected to return in FY2021.
The writ of summons was issued based on allegations that CAO was involved in fraudulent representations regarding a cargo deal transaction with Zenrock Commodities Trading Pte Ltd. While the exact claim amount remains undisclosed, See believes that this could amount to at least US$19 million ($25.9 million). With a US$406 million cash pile following 1H2020, however, the firm should be able to stomach a legal settlement.
Nevertheless, it was a quarter to forget for CAO as profits were below expectations in 1H2020. Revenue for 1H2020 fell 44.5% y-o-y despite better margins from CAO’s trading optimisation activities successfully mitigating gross profit shrinkage to 20.3% y-o-y.
Yet, this was unable to prevent a 89.9% yoy decline in associate earnings to US$3.9m from US$38.3m in 1H2019. This was largely due to a 93.8% y-o-y fall in Shanghai Pudong International Airport Aviation Fuel Supply’s (SPIA) associate contributions to US$2.1m. Consequently, CAO’s 1H2020 net profit was pulled down by 57% y-o-y.
China appears to be slowly opening its borders, with Beijing reopening visa applications from certain European countries in August. Still, a full recovery in international travel would only happen in FY2021 at best, slowing down CAO’s recovery. “We cut our FY2020-22F earnings per share by 20.3-22.2%,” she adds, lowering associate contributions from SPIA by 66.9%, 34%, 33.8% respectively in FY2020, FY2021, FY2022.
Investors, however, should continue to “hold” the stock, advises See. Nevertheless, she prices in a discount as earnings recovery could be slow and uneven while the current writof summons also puts a negative bias on near-term sentiment. While swifter recovery of international travel and a less uncertain oil markets are pluses for CAO, the counter could be weakened by prolonged Covid-19 impact and lower dividends, which has fallen from December 2019’s 5.49% to an estimated 2.68% by December 2020 and 3.6% in December 2021.
As of 1.21pm, CAO is trading at $0.86 with a dividend yield of 5.43%. Price-to-earnings (P/E) ratio is 7.95.
