China Aviation Oil could see 2023 earnings take off as international, domestic travel demand rises

SINGAPORE - Mainboard-listed China Aviation Oil (CAO) is poised for strong earnings growth in 2023, fuelled by growing international traffic, robust domestic travel and rising demand for jet fuel in China, two Singapore investment houses said.

In a Feb 22 report, Lim & Tan Securities noted that domestic flights within China have recovered to pre-Covid-19 levels since mid-2023, while outbound international travel would hit 80 per cent of pre-pandemic levels by the end of 2024.

It said CAO, whose parent group has a monopoly on jet fuel supply in China, is poised to benefit strongly from this, and stamped a target price of $1.20 on the stock.

Shares of CAO closed at 94 cents on Feb 23, down 1.58 per cent.

It was a similar message put out by OCBC Investment Research in a report dated Jan 25.

“Although CAO’s financial performance has been battered... by the pandemic and an extended period of lockdowns due to China’s zero-Covid policy, it is well-positioned to capture the gradual recovery in jet fuel demand with China’s reopening, given its entrenched presence in China and status as a market leader in the region,” wrote OCBC equities analyst Ada Lim.

The investment house had a price target of $1.10 on the stock.

Listed on the mainboard of the Singapore Exchange, CAO is 51 per cent controlled by China state-owned National Aviation Fuel Group, the largest aviation transportation logistics service provider in China, with a presence in over 210 airports across the country.

BP Investments Asia, a subsidiary of British Petroleum, holds another 20 per cent stake in CAO.

CAO, in turn, owns a 33 per cent stake in Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), which is the exclusive supplier of jet fuel at Shanghai Pudong International Airport – one of the busiest air hubs in China.

CAO also supplies fuel at Hong Kong International Airport.

“SPIA is a major earnings contributor and given its 67 per cent drop in earnings since the pandemic, we see a runway for outperformance in 2H23 (July to December 2023) as China enters a post-Covid-19 world,” wrote Lim & Tan analysts Chan En Jie and Nicholas Yon.

Analysts see CAO’s current stock price as being extremely attractive. They expect the company to unveil strong earnings recovery for 2023 and continue this earnings momentum in 2024.

CAO will unveil its results for the 2023 financial year next week.

OCBC estimates that CAO’s earnings could rise some 23 per cent to end-December 2023, while Lim & Tan is more bullish, with a 50 per cent earnings rise projection.

Given its strong cash holdings, negligible debt and strong growth, analysts are expecting CAO to pay generous dividends.

“We believe there is room for an increase in future dividends based on CAO’s 30 per cent dividend payout policy,” Lim & Tan said in its report. “CAO’s cash pile of US$534 million (S$717 million) is impressive, representing 91 per cent of current market value and with zero interest-bearing debt.”

The broking house expects CAO to declare a dividend of at least 2.4 cents for financial year 2023 and raise this payout to 3.4 cents for the current financial year.

But another development could prompt an even higher payout. With almost 90 per cent of the company’s market capitalisation in net cash, CAO’s controlling shareholders are asking for bigger payouts.

The Chinese government has directed its listed state-owned enterprises, which include CAO, to return excess capital to major shareholders via higher dividend payouts.

Members of senior management have been told to support their companies’ stock prices via share buybacks and increased investor engagement. Beijing indicated that a component of senior management remuneration package would be pegged to their company’s share price performance.

These instructions come amid Beijing’s efforts to pump-prime the country’s floundering economy, an effort that requires a massive amount of funds.