China Aviation Oil set to take off with travel rebound: CGS CIMB
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AS China opens up and travellers take to the skies, China Aviation Oil will benefit from increased fuel uptake, says CGS CIMB.
PHOTO: BLOOMBERG
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SINGAPORE - Mainboard-listed China Aviation Oil (CAO), the sole supplier of aviation fuel in China, is tipped to benefit hugely from the recovery in China’s aviation industry.
So says CGS CIMB in its latest report this week, where it upgraded the stock and posted a price target of $1.21 on the counter.
“With China reopening its borders on Jan 23, we see a clearer path to recovery for jet fuel volumes as international flights ramp up further,” wrote analysts Kenneth Tan and Izabella Tan. “On the operational front, we believe the worst is likely over.”
The report comes just days after the company reported a 13.6 per cent drop in net profit for the second-half year to December to US$13.9 million (S$18.7 million). Full-year earnings fell 16.9 per cent to US$33.5 million.
CAO, however, maintained a strong balance sheet, with cash and cash equivalents of US$308 million.
That said, an almost three-year pandemic lockdown in China has severely weighed down the company, which has an unassailable monopoly on aviation fuel supply in that country.
The stock fell to as low as 60 cents in early 2022 as China continued to shutter its borders and ground most of its international flights. But it has been recovering of late, hitting a high of around $1.07 in recent weeks. At CGS-CIMB’s target of $1.21, it has an inputted upside of almost 28 per cent.
CGS CIMB noted that the stock was trading at 8.2 times forecasted 2024 earnings, well below historical average.
“With China’s reopening in January 2023,
The report added that China had much room for recovery.
“We now see a much clearer path to recovery in international flights, and believe jet fuel supply volumes likely bottomed out in financial year 2022,” it said.
“As at the week of Feb 27, 2023, international flight capacity from China stood at about 20 per cent of pre-Covid-19 levels, indicating much room for further recovery going into the second half of 2023. We believe a recovery in supply volumes should be seen more meaningfully in the second half of financial year 2023 as airlines take time to ramp up capacity.”
The investment house forecasts a 68 per cent earnings per share leap in 2023 for CAO, premised largely on volume recovery in fuel uptake, due to significant ramp up in both domestic and international air travel.
CAO shares closed up 1.5 cents, 0r 1.6 per cent, at 97 cents on Wednesday.
