SINGAPORE (May 28): RHB Research says the decline in China Aviation Oil’s share price in the last one month is unwarranted.

Market seems overly concerned about a slowdown in China’s aviation traffic, despite passenger traffic growing by 3.9% y-o-y in April.

“However, aided by growth in China’s international passenger traffic as well as capacity expansion at Shanghai Pudong International Airport (SPIA), we remain positive on CAO’s long-term earnings growth prospects,” says analyst Shekhar Jaiswal.

In addition, its ex-cash 3.9x 2020F earnings stays compelling, adds the analyst.

Jaiswal says he is not overly concerned with China’s aviation passenger traffic declining 1.9% m-o-m in April 2019. This is mainly because the monthly traffic was still 3.9% higher y-o-y.

And while there are concerns about some negative impact from escalation of the US-China trade war, the analyst remains confident of CAO’s ability to deliver mid-single digit jet fuel supply volume growth in 2019.

For capacity expansion at SPIA, media reports suggest its satellite terminals will start operations in September. This will increase its annual capacity to 80 million passengers.

With its fifth runway already operational since late-2018, RHB believes the current capacity expansion will enable SPIA to report a strong jet fuel volume growth during 2020-2021.

CAO will continue to seek M&A opportunities. The 2018 acquisition of Navires Aviation (NAL) enabled CAO to establish a presence at four European airports, namely Schiphol, Brussels, Frankfurt, and Stuttgart.

As at end-2018, CAO supplied jet fuel to 51 airports outside mainland China in over 20 countries. CAO plans to keep expanding its customer base globally and extending its reach into key aviation markets worldwide.

“Stay ‘buy’ with $1.60 target price,” says Jaiswal.

As at 11.06am, shares in CAO are trading flat at $1.23 or 0.9 times FY20F book value.