Peggy Mak of PhillipCapital has maintained her "buy" call for China Aviation Oil, and has raised her target price to $1.05 from $1.01 following the jet fuel supplier's better-than-expected FY2023 earnings and prospects for further improvements.
Despite lower revenue because of lower oil prices, CAO on Feb 29 reported earnings of US$58.4 million for the year ended Dec 31 2023, up 75.5% over the preceding year.
The better showing can be attributed to stronger demand for jet fuel in tandem with the resumption of air travel, sold at better margins.
However, the bottom line was somewhat weighed down after CAO made an impairment of US$12 million for goodwill and investment in an associate.
In her March 4 note, Mak points out that China’s international air traffic is still at 37% below pre-Covid level, suggesting further room to grow. "Flights are progressively being restored with further normalization of aviation services."
Her higher target of $1.10 is derived after raising her current year FY2024 earnings estimates by 17% to factor in better margins.
For FY2023, CAO is paying a full-year dividend of 5.05 cents. Mak is expecting a higher payout for the current FY2024.
Separately, Ada Lim of OCBC Investment Research has kept her "buy" rating and $1.10 target price.
In the near term, she sees the potential for CAO, wielding its cash balance of US$373 million, to acquire new businesses or ramp up organic growth.
CAO shares closed at 91 cents on March 4, unchanged for the day but down 7.65% in the past 12 months.
Besides inorganic growth, another potential near-term catalyst could be improving profit margins, as CAO focuses on executing more end-to-end deals directly to customers.
Lim is "cautiously optimistic" that there remains potential for further upside this year, noting that outbound travel demand from China has been sluggish through 2023, no thanks to visa issues and weak consumer sentiment and sluggish restoration of international flight capacity.
"The increasing affluence of the APAC region and burgeoning middle class in China will support the long-term growth of the regional aviation fuel market, making CAO an attractive multi-year investment story," she adds.
