RHB Research have maintained its “buy” call on China Aviation Oil (CAO) with a raised target price of $1.15 from $1.05 as they expect domestic air traffic to improve even after the Golden Week holidays. 

According to the Civil Aviation Administration of China, during the Golden Week holidays, China saw 13.3 million passenger trips, and the average daily passenger traffic and average daily flight volume reached 91% and 90% of the same period last year.

Analyst Shekar Jasiwal said there was “a gradual but partial recovery” in international aviation traffic in China - especially at Shanghai Pudong International Airport -  should support CAO’s FY21 earnings growth. 

He also said the recent share price run-up, valuations remain compelling amidst expectations of about 30% profit growth in 2021.

Separately, Jasiwal thinks China is well-positioned to extend its leadership in global aviation traffic recovery, as it manages to keep Covid-19 under control. 

He cited a news report last month which referenced comments from Wu Guizhen, chief bio-safety expert at the Chinese Center For Disease Control and Prevention, that COVID-19 vaccine shots will be ready for public use as early as November or December in China. 

This is as final-stage clinical trials of several vaccine candidates have progressed very smoothly. An effective vaccine development could significantly improve travel sentiment – not only in China, but also in the region, which will, in turn, benefit CAO. 

Finally, he said despite the rise in the stock price, CAO’s 2021 price to earnings ratio (P/E) of 9.3x is below the range of multiples of its global jet fuel-supplying peers, and implies only 0.3x 2021 price/earnings to growth ratio (PEG). 

The company has a zero debt balance sheet with a net cash position of US$406.7 million ($552.7 million), which is equivalent to about 64% of its market cap. On an ex-cash basis, the stock is trading at a compelling 3.3x 2021 P/E.

As at 11.28am, shares of CAO were trading at $1.01, with a FY20 price to book ratio of 0.7 and dividend yield of 4.7%.