Excerpts from RHB report

Analyst: Shekhar Jaiswal

 Keep BUY, new SGD1.25 TP from SGD1.30, 23% upside and 4% 2021F yield. We lower 2020F profit by 19% to account for slower international aviation traffic recovery and weak 1H20 earnings for SPIA. 

China Aviation Oil

Share price: 
$1.02

Target: 
$1.30

CAO is a good proxy to the Chinese aviation industry, and should witness an earnings revival from 4Q20.

Its monopolistic position in China and cost-plus business model ensure free cash flow generation.

Its stock is trading below its NTA/share of USD0.95 (c.SGD1.30), and at ex-cash 2021F P/E of just 2.6x..


cao planeCAO owns a 33% stake in SPIA, the sole supplier of jet fuel for the second largest airport in the PRC – Shanghai Pudong International Airport.
Photo: CAO


♦ Weak 1Q20 earnings. China Aviation Oil reported disappointing 1Q20 net profit of USD10.8m (-59% YOY, -49% QoQ).

This was due to lower attributable profit of USD5.6m (-68% YoY, -58% QoQ) from Shanghai Pudong International Airport Aviation Fuel Supply Co (SPIA), a 33%- owned associate of CAO.

SPIA offers exclusive aircraft refuelling services at Shanghai Pudong International Airport (SPA).

Historically, SPIA has accounted for c.65% of CAO’s PBT. Earnings were also dragged lower by weak international aviation traffic in China.

 Lower earnings in the near term. About 20% of CAO’s gross profit is attributable to supply of imported jet fuel to China.

While the cost-plus model for this business ensures that CAO reports profit, earnings growth is linked to China’s international aviation traffic.

Even for SPA, c.40% of aircraft movements at the airport accrue from international traffic.

We now expect international aviation passenger traffic in China and at SPA to start improving only towards end-3Q20 instead of the earlier expectation of end-2Q20.

To account for this, we lower 2020 earnings estimates by 19%. We lower 2021F-2022F estimates by 6-7% as well.

Domestic recovery

ShekharJaiswalWith the spread of COVID-19 infections now under control in China, we believe there is scope for an earlier-than-expected recovery in China’s domestic aviation traffic.

-- Shekhar Jaiswal (photo),
analyst, RHB 

♦ Domestic aviation traffic in China is recovering and could still help re-rate the stock. With the spread of COVID-19 infections now under control in China, we believe there is scope for an earlier-than-expected recovery in China’s domestic aviation traffic.

China's aviation regulator (CAAC) noted MoM improvement in aviation traffic.

Passenger numbers rose 7.9% this month as of 21 Apr, and the number of daily flights rose only 1% in April from March.

While this will not support a recovery in CAO’s jet fuel import volume that is dependent on China’s international aviation traffic, SPIA could still report higher jet fuel volumes for 2H20.

 Valuations undemanding. CAO continues to trade below its net tangible asset value per share of USD0.95 (c.SGD1.30).

Its 2021F P/E of 6.8x is below its peers.

Our SGD1.25 TP implies 0.9x P/NTA, which is reasonable given the near-term earnings weakness.

In addition, a strong net cash position (c.60% of its market cap) should enable CAO to undertake a sizable earnings-accretive acquisition.

Its ex-cash 2021F P/E is just 2.6x.



Full report here.

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