RHB Group Research analyst Shekhar Jaiswal has lowered his target price on China Aviation Oil (CAO) as the jet fuel crack remained below his expectations of US$4 ($5.42) per barrel.

“We have marked to market jet fuel prices, and adjusted our estimates to reflect the 9MFY2021 aviation traffic in China and Shanghai Pudong International Airport (SPA),” writes Jaiswal, who has maintained his “buy” call on CAO.

“We expected the jet fuel crack to gradually rise in 2021, amid higher demand for jet fuel, as aviation traffic grows in key countries with large domestic aviation markets,” he adds.

The jet fuel crack refers to the difference between Brent crude oil price and jet fuel price.


See: RHB maintains 'buy’ call for China Aviation Oil despite 'weak' near-term outlook


As at Jaiswal’s report dated Oct 1, the jet fuel crack expanded to US$2 per barrel in 3QFY2021, from the 80 US cents a barrel in the 2QFY2021.

mute
“Implied annualised flight traffic at SPA, based on the first eight months of data, is tracking 5% below estimates. We also incorporated our revised Brent crude oil price forecast of US$71.00-69.00/barrel for FY2021-2022,” he says.

Due to China’s aviation year-to-date traffic and with the spread between jet fuel and Brent crude prices tracking below his estimates, Jaiswal has lowered his estimates for the FY2021 to FY2022 by 2% to 4%.

That said, as China’s domestic aviation traffic is recovering from the lows seen in August, Jaiswal is also optimistic that its international aviation traffic will likely see a material recovery in 2022.

“We expect FY2022 profit to surge by 49% y-o-y, while a return to pre-pandemic earnings levels could take two to three years, in line with the anticipated recovery in global aviation traffic,” he writes.


For more stories about where the money flows, click here for our Capital section


According to Jaiswal’s estimates, CAO’s FY2022 price-to-earnings (P/E) is at 8.1 times, implying a “compelling” 0.17 times FY2022 price/earnings-to-growth (PEG).

“The stock is trading at a compelling 4.2 times FY2022 P/E on an ex-cash basis (cash is at [around] 48% of its market cap). Based on our in-house proprietary methodology, we derived an ESG score of 2.7. Accordingly, we applied a 6% discount to our blended fair value of $1.15 to arrive at a $1.08 target price (TP).”

Shares in CAO closed flat at 95 cents on Oct 4, with an FY2021 P/B of 0.7 times and dividend yield of 2.8%.