SINGAPORE (Mar 27): RHB Research is upgrading its call on China Aviation Oil (CAO) to “buy” from “hold”, while raising its target price on the stock by 10 cents to $1.60 to suggest 26% upside plus 3.6% yield.

This comes as the research house expects CAO to benefit from signs of a strong recovery in international passenger growth in China, in addition to the anticipated capacity constraints of its 33%-owned associate, Shanghai Pudong International Airport (SPIA).

In a Wednesday report, analyst Shekhar Jaiswal says he foresees the strong growth in China’s international passenger traffic numbers as seen in 2018 sustaining into 2019 as well, supported by the rise in jet fuel imports into China.

“We expect jet fuel imports to continue growing in line with growth in international passenger traffic. CAO will be a key beneficiary of this trend as it is the sole importer of jet fuel into China that is consumed by all of the country’s outbound international flights,” states the analyst.

Further, Jaiswal says growth in SPIA’s profits could exceed RHB’s current conservative estimates once its capacity constraints are reserved upon the completion of its fifth runway, and once operations at its new satellite terminal commences in 2H19.

The capacity expansion has also led prompted him to expect the higher dividend payout in 2018 to sustain going forward, with CAO receiving 90% of its share of profits from SPIA as dividends.

“This should further add to CAO’s net cash balance, which currently accounts for 45% market cap. CAO is trading at 4.6 times 2019F P/E on an ex-cash basis, which we deem to be compelling,” concludes Jaiswal.

As at 9.55am, shares in CAO are trading 2 cents higher at $1.29, or 1.01 times FY19F book value.