Optimistic on gradual traffic recovery, RHB Group Research analyst Shekhar Jaiswal is choosing to look past China Aviation Oil’s profit warning for 2021 and China’s strict zero-Covid-19 policy.
“Despite lowering 2021F-2023F earnings by 3%-11%, we believe valuation remains compelling as we remain confident of a gradual profit growth as aviation traffic recovers over the next two years,” writes Jaiswal.
In a Feb 3 note, Jaiswal is maintaining “buy” on China Aviation Oil with a lowered target price of $1.09 from $1.13 previously. The new target price represents a 16% upside and about 2% yield.
China Aviation Oil (CAO) supplies jet fuel to foreign and domestic airlines flying through Chinese and international airports. The company also trades in other oil products, such as fuel oil and gas oil. Its state-owned parent is the Asia Pacific’s largest physical jet fuel trader and sole supplier of imported jet fuel for China’s civil aviation market.
CAO has issued a profit warming stating that it expects 2021 profit before tax to decline by 26% y-o-y. Pudong International Airport Aviation Fuel Supply Company (SPIA), CAO’s 33% owned associate and a main profit contributor to CAO, has posted significantly lower earnings for 2HFY2021.
The resurgences of Covid-19 in China during 2H2021 had significantly decreased SPIA’s jet fuel supply volume as a result of flight cancellations and disruptions of operations at Shanghai Pudong International Airport, says Jaiswal. More details will be disclosed during CAO’s full year results announcement on Feb 25.
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In the near term, oil prices could be fuelled by resilient oil demand and heightened geopolitical tensions, that may result in supply disruptions which could threaten the global spare capacity, says Jaiswal.
“We have incorporated the revised oil price estimates in our forecast and increased 2022-23 revenue estimates by 9%-20%,” he adds.
China’s attempts to stamp out Covid-19 completely remains a drag, says Jaiswal. “With the 2022 Winter Olympics commencing soon, China has ramped up flight cancellations under its zero-Covid-19 strategy. Circuit breakers that suspend international routes for up to eight weeks are triggered if five or more Covid-19 cases are found among passengers after arrival.”
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For the week of Jan 29 to Feb 5, international commercial aviation traffic in China is at 21% below 2021 levels, and 72% below 2019 levels. Domestic commercial aviation traffic is also trending 25% lower y-o-y.
That said, valuation remains compelling, writes Jaiswal. “From a low base of 2021, we expect CAO to report a 46% profit growth in 2022. CAO’s 2022F price-to-earnings (P/E) is at 10 times, implying an exciting 0.2 times 2022F price-earnings-growth ratio (PEG).”
The stock is trading at a “compelling” 5.2 times 2022F P/E on an ex-cash basis, he adds, with cash at approximately 48% of its market capitalisation. “We have applied a 6% ESG discount to our blended fair value of $1.16 to arrive at a $1.09 target price.”
As at 11.45am, shares in China Aviation Oil are trading 1.5 cents lower, or 1.6% down, at 95 cents.
Photo: Bloomberg
