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

Atiqah Mokhtar
Atiqah Mokhtar9/17/2021 01:19 PM GMT+08  • 3 min read
RHB maintains 'buy’ call for China Aviation Oil despite 'weak' near-term outlook
China’s domestic aviation traffic could fall amidst a resurgence of Covid-19 cases.
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RHB Group Research analyst Shekhar Jaiswal has reiterated his “buy” call for China Aviation Oil (CAO) with an unchanged target price of $1.15 in a Sept 15 research note.

Jaiswal has maintained his outlook, despite a potential risk of China’s domestic aviation traffic falling again amidst a resurgence of Covid-19 cases in Fujian. This comes as Shanghai Pudong International Airport (SPIA) has seen operations impacted by Typhoon Chanthu.

See also: Broker's Digest: SPH REIT, PropNex, China Aviation Oil

He points out that China’s aviation passenger volume fell over 50% y-o-y to 22.4 million in August. While the Civil Aviation Administration of China, the country’s aviation regulator, suggested that domestic traffic will increase in October, Jaiswal isn’t as optimistic. “We believe the recent surge of Covid-19 infections in the south-eastern province of Fujian – if not contained – could mean more restrictions for domestic travel,” he says.

He anticipates the restrictions will dampen the recovery expected in air travel during the Mid-Autumn Festival and National Day travel season in mid-September and early October.

Jaiswal also highlights that while aviation traffic at SPIA has seen a slow recovery in early September, cargo operations at the airport have been disrupted due to a labour shortage and a resurgence in Covid-19 cases, according to news reports.

Traffic at SPIA also saw a sharp decline following a temporary halt in operations when Typhoon Chanthu approached the city.

Despite the weak near-term outlook, Jaiswal expects things to pick-up in 2002, driven by a resumption of international travel. “While there could be downside risks to our 2H2021 estimates if restrictions on domestic travel are imposed again, we maintain that a material recovery in China’s international aviation traffic and the rebound of domestic aviation traffic will happen next year,” he says.

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He expects CAO’s FY2022 profit to surge 46% y-o-y, while a return to pre-pandemic earnings level could take two to three years, in line with the recovery in global aviation traffic.

Alongside a project recovery in earnings for 2022, Jaiswal points out that CAO’s valuations remain “compelling”. “CAO’s 2022 P/E is at 8.4 times, implying a compelling 0.2 times 2022 P/E-to-growth,” he says. The stock is trading 4.6 times 2022F P/E on an ex-cash basis, with cash making up around 45% of its market cap.

As at 12.39pm, shares in CAO are trading 1.5 cents or 1.54% lower at 96 cents.

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