Analysts from CGS International and Lim & Tan Securities are keeping their “add” and “buy” calls on China Aviation Oil (CAO) after the company reported a “strong set” of results for the 1HFY2024 ended June 30.
On Aug 14, CAO reported earnings of US$42.4 million ($55.2 million) for the six-month period, 114.8% higher y-o-y than its earnings of US$19.7 million in the corresponding period the year before.
Revenue rose by 20.1% y-o-y to US$7.54 billion mainly due to the increase in oil price and business volume while gross profit surged by 127.1% y-o-y to US$24.2 million mainly due to higher profits derived from jet fuel supply business, in line with the increase in jet fuel supply volume.
Share of profits from associates also grew by 180.2% y-o-y to US$23.1 million mainly from higher contribution from CAO’s key associate, Shanghai Pudong International Airport (SPIA) Aviation Fuel Supply Company Ltd.
Following CAO’s results, CGSI analysts Kenneth Tan and Lim Siew Khee called CAO an “attractively valued laggard”.
“We expect strong earnings recovery to continue into 2HFY2024 as further outbound traffic recovery drives two-pronged volume growth,” write Tan and Lim in their Aug 22 report. The double-pronged recovery stems from better volumes for CAO’s jet fuel supply business and SPIA.
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In the 1HFY2024, CAO reported a 66% y-o-y increase in jet fuel supply volumes of 6.2 million metric tonnes (mt) as China’s outbound flight volumes continued to recover. However, other oil product trading volumes declined 29% y-o-y, which the analysts believe, was driven by CAO focusing more on higher-margin jet fuel transactions. Gross profit per tonne surged by 111% y-o-y due to an increase in higher-margin transactions and lesser proportion of low-margin other oil products traded. Volumes for SPIA were estimated to be up by 2.5 times to 3.0 times in 1HFY2024 as CAO does not disclose refueling volumes on a semi-annual basis.
In view of the “strong” 1HFY2024 performance and with CAO’s net profit at 59% of their FY2024 forecast, Tan and Lim have raised their core earnings per share (EPS) estimates for FY2024 to FY2026 by 3% to 8% mainly on stronger gross profit margin (GPM) assumptions.
“We believe CAO should be able to sustain FY2024 – FY2026 GPM at 0.28% - 0.29% as the group places less focus on lower-margin other oil products,” the analysts say. With the higher EPS estimates, their target price is raised to $1.20 from $1.16 previously. Their new target price is still based on 9.5 times CAO’s P/E for 2025.
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“[The] current valuation of 6.7 times 2025 P/E (1 standard deviation or s.d. below FY2010 – FY2019 mean) does not sufficiently reflect CAO’s healthy earnings recovery ahead, in our view,” they add.
Referring to CAO’s balance sheet, its net cash of US$353 million, which is at 60% of CAO’s market capitalisation as of Aug 21, as well as healthy operating cash flows and zero debt should allow the company to maintain its FY2024 dividend per share (DPS) at 5.05 cents, in line with its FY2023 dividend. The amount indicates a “decent yield” of 5.9%, the analysts say.
Overall, they like CAO for its healthy earnings recovery trajectory, decent yield, and inexpensive valuation. “CAO’s year-to-date (ytd) share price movement has been lacklustre (-2% ytd), in our view, which we believe does not adequately reflect CAO’s strong earnings recovery in the coming quarters,” they write.
Lim & Tan Securities analyst Chan En Jie also likes CAO’s prospects as the company’s 1HFY2024 results came within his expectations. CAO’s overall revenue for the period stood at 43% of his forecast while net profit came in at 58% of his full-year estimates.
“Both CAO’s top-and-bottom lines benefited from the resurgence in global air travel demand,” Chan notes in his Aug 21 report.
“CAO has delivered a strong set of results with the faster-than-expected international air traffic rebound in China,” he adds.
For the second half of 2024, the Civil Aviation Administration of China (CAAC) expects further growth in international air passenger traffic, which should boost jet fuel demand. As such, CAO remains well-placed to end 2024 on a strong note.
Chan’s target price is unchanged at $1.24. It is pegged to 11.0 times its FY2024 P/E representing a 10% discount to CAO’s five-year average P/E of 12.2 times.
Shares in CAO closed 0.5 cents lower or 0.58% down at 86.5 cents on Aug 23.
