SINGAPORE (Nov 2): CGS-CIMB Securities is maintaining its “add” call on China Aviation Oil (CAO), lowering its target price on the stock to $1.83 from $2.03 to account for a wider discount of 30% of peer average compared to 25%.

The new target price is now based on 12 times FY19F earnings as opposed to 12.5 times previously, and comes after the release of CAO’s 3Q18 results which reflected an 8% y-o-y fall in earnings to $26 million due to reduced contributions from associates.

In a Thursday report, analyst Cezzane See says she continues to like CAO as a longer-term proxy to China’s growing outbound travel, as well as its healthy balance sheet.

In See’s view, CAO’s net cash position of 27.7 US cents per share as at end-3Q gives the group ample headroom to participate in acquisitions – especially since its management previously mentioned that it is always open to merger and acquisition (M&A) opportunities for the expansion of its global jet supply and trading network, complemented with trading in other products.

Nonetheless, See has lowered FY19F and FY20F earnings per share (EPS) forecasts by 6.24% and 10.3%, respectively,.

“We opt to be slightly cautious on forward growth prospects as the crude oil markets are still in backwardation mode [which will impact CAO’s trading volumes and Oilhub Korea Yeosu Co’s (OKYC] leasing activities) and the potential that Shanghai Pudong International Airport (SPIA) could still be affected by a depreciating RMB vs. USD,” explains the analyst.

“Catalysts are higher product volumes and associate earnings. Downside risks include lower volumes, margins and associate earnings,” she adds.

Shares in CAO were down by 6 cents at $1.32 prior to the midday trading break.