CGS-CIMB Research analysts Kenneth Tan and Lim Siew Khee have kept their “add” call on China Aviation Oil (CAO) as they expect CAO to report a net profit of US$26 million ($34.5 million) for the 2HFY2023 ended Dec 31, 2023. CAO is expected to report its results for the 2HFY2023 and FY2023 in the last week of February.
The analysts’ 2HFY2023 net profit estimates represent an 88% growth y-o-y and 32% growth h-o-h and are expected to be driven by an improved trading environment and rebounding contribution from its associates.
“We think 2HFY2023 gross profit should recover off 1HFY2023 lows to US$14 million (+28% h-o-h, flat y-o-y) on the back of [around] 50% y-o-y increase in jet fuel trading volumes, in line with recovering China outbound flights, and more trading opportunities,” write Tan and Lim, who kept their target price unchanged at $1.14.
“As crude oil prices showed better stability in 2HFY2023 compared to 1HFY2023, we think CAO’s traders were able to capitalise on more margin optimising trading opportunities in the second half. We forecast 2HFY2023 share of associates profits to rise 75% h-o-h and 76% y-o-y, as 33%-owned associate Shanghai Pudong International Airport (SPIA) likely benefitted from strong passenger throughput growth at Pudong Airport,” they add.
In FY2024, CAO is also likely to benefit from the anticipated growth in outbound flight volumes from China.
The Civil Aviation Administration of China announced, on Jan 4, that it expects international flight volumes to reach 80% of its pre-Covid-19 levels by the end of 2024, giving the analysts “greater certainty” of travel recovery ahead.
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“While domestic economic weakness and visa issues have resulted in international flight volumes recovering slower than we had previously anticipated, we think FY2024 volume recovery will be driven by eased visa restrictions for tourists entering China, complete lifting of Covid-19 restrictions within China, and further restoration of flight routes between China and laggard countries (notably US and Japan),” say Tan and Lim.
Healthy EPS growth and ‘decent valuation’
Overall, the analysts like CAO for its robust earnings growth trajectory ahead, which could help re-rate the stock back to its historical average of 10 times FY2024 P/E, which their target price is based on.
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“Over the past year, CAO’s share price has fallen 9% on concerns over slow recovery in China international flight volumes, resulting in its forward P/E multiple de-rating from 12 times to 8 times currently (0.7 standard deviation or s.d. below FY2010 – FY2019 historical mean),” they note
At its current share price, CAO is valued at around an “attractive” 8 times FY2024 P/E.
As at 3.05pm, shares in CAO are trading 3.5 cents higher or 4.07% up at 89.5 cents.
