A bumpy take-off for China Aviation Oil (CAO) has OCBC Investment Research maintaining its “buy” call, but with a lower target price of $1.10 from $1.12 previously.
OCBC’s Ada Lim says that CAO had a disappointing 1HFY2023 ended June results, on the back of slower-than-expected outbound travel recovery from China.
CAO’s 1HFY2023 total revenue fell 32.4% y-o-y to US$6.3 billion, with the company hamstrung by lower oil prices and a 16.1% y-o-y decline in total supply and trading volume, says Lim.
In addition, share of results from associates also fell 14.7% y-o-y to US$8.3 million ($11.23 million), largely due to a 15.9% decline in contributions from key subsidiary, Shanghai-Pudong International Airport Aviation Fuel Supply Company (SPIA), which suffered an inventory impairment caused by the decline in oil prices.
Lim notes that CAO’s lower revenue and gains from trading activities were partially offset by other operating income (as compared to a loss in 1HFY2022), on the back of higher interest income which increased by $8.8 million y-o-y, as well as favourable exchange rate movements.
“Altogether, CAO reported a relatively stable net profit of US$19.4 million, down 1.1% from US$19.6 million in 1HFY2022. The company remained in a strong net cash position as at 30 June 2023, with US$534.4 million worth of cash and cash equivalents and no net interest-bearing debt,” says Lim.
CAO is heavily dependent on international flights out of China, and suffered from lagging outbound travel recovery in 1HFY2023.
However, Lim “awaits a more meaningful outbound travel recovery”, noting that search popularity for outbound flight tickets in the summer has exceeded the same period in 2019, suggesting a healthy appetite for outbound travel.
In addition, given CAO’s entrenched presence in China and status as a market leader in the region, Lim says that it is well positioned to capture the gradual recovery in jet fuel demand with China’s reopening,
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The increasing affluence of the Asia Pacific region and burgeoning middle class in China will also support the long-term growth of the regional aviation fuel market, making CAO an attractive multi-year investment story, adds Lim.
She notes that data from the Civil Aviation Administration of China showed that there were only 3,368 weekly international passenger flights as at the end of June 2023, accounting for about 44% of pre-pandemic levels.
“Going forward, we expect policy support to promote further outbound travel recovery, given that the need to increase international flight capacity was explicitly mentioned at July’s Politburo meeting,” says Lim.
Lim turns more conservative on her forecasts by delaying some of her recovery assumptions, while fine-tuning some of her cost of equity assumptions.
“As a result, our fair value estimate dips from $1.12 to $1.10. CAO is currently trading at a 12-month forward PE ratio of 8.39x, which is slightly below its five-year historical average of 8.44x,” she adds.
As at 4.53pm, shares in China Aviation Oil are trading 1 cent lower, or 1.08% down at 92 cents.
