SINGAPORE (Jan 21): RHB Group Research is reiterating its “buy” call on China Aviation Oil (CAO) with a target price of $1.55, representing a 21% upside for the stock.

In a Tuesday report, RHB analyst Shekhar Jaiswal continues to remain sanguine on the group’s long-term growth prospects, which could well be boosted by the continuing rise in China’s aviation traffic, as well as the group’s diversification into jet fuel supply to non-Chinese markets.

Firstly, Jaiswal highlights how a 17% hike in China’s international aviation passenger traffic could bode well for CAO, as all international flights flying out of China are required to use imported jet fuel.

As the sole supplier of imported jet fuel for China, CAO stands to reap profits the mid-single-digit jet fuel supply volume growth forecasted by RHB from 2019 to 2021.

“This compares with an average volume growth of 11% over the last 10 years. Based on reported numbers, we estimate CAO registering growth in jet fuel supply volumes to regions outside China for three consecutive quarters during 9M19,” says Jaiswal.

“This is in line with its efforts to diversify from its reliance on the Chinese aviation market,” adds Jaiswal.

In addition, Jaiswal notes that the recent capacity addition in the Shanghai Pudong International Airport (SPA) could bring about positive effects for the group. The addition of satellite terminals at SPA has increased the airport’s annual passenger handling capacity to 80 million from 74 million in 2018.

“Shanghai Pudong International Airport Aviation Fuel Supply (SPIA) – which is 33%-owned by CAO and accounts for 65% of the latter’s profit before tax – witnessed margins pressure in 2019 amidst weakening of the Chinese Yen against the USD,” observes Jaiswal.

Jaiswal adds that the government’s decision to lower wholesale aviation fuel prices and rates charged by CAO’s China National Aviation Fuel Group parent to the airlines could also have contributed to the margin pressure.

“However, as the airport’s sole refueller, we maintain that capacity addition at SPA could enable SPIA to register higher-than-estimated jet fuel volume growth in 2020-2021,” opines Jaiswal.

In addition, Jaiswal identifies how CAO remains attractive on the share price front, especially since the stock outperformed the benchmark Straits Times Index in 2019.

CAO still has a low price-to-earnings (PE) ratio of 8.5 times for FY20F, rendering it cheaper compared to its regional and global peers which have a PE ratio of 12.1 to 22.6 times.

“Given its zero debt balance sheet and significant net cash position (24% of its market cap), CAO should be able to undertake a sizable earnings-accretive acquisition,” says Jaiswal.

As at 3.44pm, shares in China Aviation Oil are trading two cents lower, or 1.6% down, at $1.26. This translates to a dividend yield of 3.5% for FY20F according to DBS valuations.

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