SINGAPORE (March 3): RHB is keeping its “buy” recommendation on China Aviation Oil (CAO) while lifting its target price on the stock from $1.61 previously to $1.83, as the group remains on track to deliver steady earnings growth on and higher dividend yields.
The jet fuel trader and supplier last month announced a 45.1% increase in FY16 earnings to US$88.9 million ($125.7 million) on higher gross profit and growth in contributions from its associated companies.
(See also: China Aviation Oil posts 45% rise in FY16 earnings to US$89 mil)
In a report on Friday, analyst Shekhar Jaiswal shares that RHB has increased its 2017F-2018F profit estimates for CAO by 6-7% to account for higher volume growth, improved margins for the group’s oil trading unit, as well as higher revenue contributions from its 33%-owned jet fuel supplier of Shanghai Pudong Airport, SPIA.
He projects SPIA to witness 15-20% growth over 2017-2018, with the rise of Shanghai as a financial centre and the opening of Disneyland.
“Shanghai Airport Authority plans to increase its annual airport capacity to 80m passengers by 2019 and 120 million passengers by 2035, from 60 million passengers currently. It is worth noting that SPIA accounts for 90% of CAO’s earnings from associates and 66% of its PBT. SPIA also pays almost 90% of its earnings as dividends,” says Jaiswal.
The analyst also believes the group is well-poised to undertake major acquisitions or investments, given its US$187 million in net cash.
“While CAO’s management remains focused on pushing for higher organic growth, we believe the cash could be used to invest in suitable ‘asset-light’ aviation-related assets outside China,” he adds.
“We think that the strong growth in 2016 earnings and expectations of continuing organic growth – which could be boosted by an earnings-accretive acquisition – should enable the stock to be re-rated as we progress through 2017.
At 12:44pm, shares of CAO are trading at $1.50.
