DBS Group Research is keeping its “buy” recommendation on China Aviation Oil (CAO) with an increased target price of $1.38 from $1.20 previously.
In a Jan 25 report, lead analyst Paul Yong says, “We continue to see strong value for CAO at less than 3 times FY2021 ex-cash P/E, and its share price could re-rate even further if the company can make a significant earnings-accretive acquisition.”
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At this juncture, Yong believes that CAO is a beneficiary of the strong recovery in China’s domestic air traffic at Shanghai Pudong International Airport (SPIA).
Departing frequencies at SPIA has picked up substantially since May 2020, reaching about 70% of pre-Covid-19 levels in Jan 2021, and is expected to stay firm as long as the pandemic remains under control in China.
“Hence, CAO’s earnings should improve materially from 2HFY2020 as key 33%-owned associate SPIA (which is the sole supplier of jet fuel for the airport) typically accounts for more than half of its earnings,” adds Yong.
As vaccines are being rolled out, international air travel recovery is in sight. With that, CAO’s supply volumes are expected to pick up more meaningfully from 2HFY2021, assuming the vaccinations being rolled out now in key aviation markets will allow international flights to resume in greater numbers. Meanwhile, its trading business should continue to do well in a contango market for oil.
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“With the worst for the aviation sector likely behind us, we value the company based on 11 times (+1 standard deviation of its mean) FY2021 P/E as earnings are set to recover firmly in the next 12 months,” says Yong.
As at 12.40pm, shares in CAO are trading at $1.17 or 0.9 times FY2020 book with a dividend yield of 2.2%.
