Lim & Tan Securities have initiated “buy” on China Aviation Oil with a target price of $1.20. The target price is pegged to 11.5 times CAO’s FY2024 P/E representing a 10% discount to its five-year average P/E of 12.7 times. The target price also presents a potential upside of 29.7% to CAO’s share price of 92.5 cents as at the brokerage’s Feb 22 report.
CAO is the largest physical jet fuel buyer in Asia Pacific (APAC). It is also the main supplier of imported jet fuel to China’s civil aviation industry.
“After several years of a weakened aviation industry, CAO now stands as a beneficiary of rising international air traffic and jet fuel demand in China,” say analysts Chan En Jie and Nicholas Yon, who note that domestic flights within the country have recovered to their pre-Covid-19 levels since mid-2023. Outbound flights, however, have seen a slower pace of recovery so far, reaching 65% of its pre-Covid-19 levels as at December 2023.
That said, the Civil Aviation Administration of China (CAAC) has estimated that China’s international air market will hit 80% of its pre-Covid-19 levels by the end of 2024.
“A sustained increase in China’s jet fuel demand will provide opportunities for CAO’s jet fuel supply and trading business,” note Chan and Yon.
In addition, CAO’s 33%-owned Shanghai Pudong International Airport Aviation Fuel Supply Company Ltd (SPIA), which is seen to be a “key asset” within the company, is also tipped to benefit from the return of international travellers. SPIA is the exclusive supplier of jet fuel and into-plane services at Shanghai Pudong International Airport. The airport is also one of the busiest airports in China in terms of air passenger numbers.
“SPIA is a major earnings contributor and given its 67% drop in earnings since the pandemic, we see runway for outperformance in 2H2023 as China enters a post-Covid world,” say the analysts.
Furthermore, the positive mid-term outlook in China’s aviation fuel market is also set to be a plus for CAO.
“Civil airports [in the country] have grown at a 3% compound annual growth rate (CAGR) over the past decade and is targeted to reach 270 civil airports in 2025, up from 259 in 2023. Domestic jet fuel consumption has grown by 5% CAGR over the past decade and with current consumption levels of 744k barrels/day about 10% below 2019 levels, the return of international flights will provide the impetus for further growth in trading and supply volumes,” say Chan and Yon.
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At its current share price levels, CAO is trading at 8.9 times its FY2024 P/E and 0.65 times P/B.
“CAO’s valuations are attractive given its strong earnings potential where we forecast profits to double over the next two years. CAO’s cash pile of US$534 million ($716.8 million) is impressive, representing 91% of current market cap and with zero interest-bearing debt,” the analysts write.
“Based on CAO’s 30% dividend payout policy, we estimate dividends to increase to 2.4 cents/3.1 cents for FY2023/FY2024 which could provide shareholders with a 2.6%/3.4% yield,” they add.
As at 10.51am, shares in CAO are trading 1 cent lower or 1.05% down at 94 cents.
