A bumpy take-off for China Aviation Oil (CAO) has OCBC Investment Research maintaining its &ldquo buy&rdquo call, but with a lower target price of $1.10 from $1.12 previously.

 

OCBC&rsquo s Ada Lim says that CAO had a disappointing 1HFY2023 ended June results, on the back of slower-than-expected outbound travel recovery from China.

 

CAO&rsquo s 1HFY2023 total revenue fell 32.4% y-o-y to US$6.3 billion, with the company hamstrung by lower oil prices and a 16.1% y-o-y decline in total supply and trading volume, says Lim.

 

In addition, share of results from associates also fell 14.7% y-o-y to US$8.3 million ($11.23 million), largely due to a 15.9% decline in contributions from key subsidiary, Shanghai-Pudong International Airport Aviation Fuel Supply Company (SPIA), which suffered an inventory impairment caused by the decline in oil prices.

 

Lim notes that CAO&rsquo s lower revenue and gains from trading activities were partially offset by other operating income (as compared to a loss in 1HFY2022), on the back of higher interest income which increased by $8.8 million y-o-y, as well as favourable exchange rate movements.

 

&ldquo Altogether, CAO reported a relatively stable net profit of US$19.4 million, down 1.1% from US$19.6 million in 1HFY2022. The company remained in a strong net cash position as at 30 June 2023, with US$534.4 million worth of cash and cash equivalents and no net interest-bearing debt,&rdquo says Lim.

 

CAO is heavily dependent on international flights out of China, and suffered from lagging outbound travel recovery in 1HFY2023.

 

However, Lim &ldquo awaits a more meaningful outbound travel recovery&rdquo , noting that search popularity for outbound flight tickets in the summer has exceeded the same period in 2019, suggesting a healthy appetite for outbound travel.

 

In addition, given CAO&rsquo s entrenched presence in China and status as a market leader in the region, Lim says that it is well positioned to capture the gradual recovery in jet fuel demand with China&rsquo s reopening,

 

The increasing affluence of the Asia Pacific region and burgeoning middle class in China will also support the long-term growth of the regional aviation fuel market, making CAO an attractive multi-year investment story, adds Lim.

 

She notes that data from the Civil Aviation Administration of China showed that there were only 3,368 weekly international passenger flights as at the end of June 2023, accounting for about 44% of pre-pandemic levels.

 

&ldquo Going forward, we expect policy support to promote further outbound travel recovery, given that the need to increase international flight capacity was explicitly mentioned at July&rsquo s Politburo meeting,&rdquo says Lim.

 

Lim turns more conservative on her forecasts by delaying some of her recovery assumptions, while fine-tuning some of her cost of equity assumptions.

 

&ldquo As a result, our fair value estimate dips from $1.12 to $1.10. CAO is currently trading at a 12-month forward PE ratio of 8.39x, which is slightly below its five-year historical average of 8.44x,&rdquo she adds.

CAO will benefit from a strong recovery in China' s aviation sector, says OCBC Securities.

SINGAPORE &ndash Despite its underwhelming performance in the first half of 2023, China Aviation Oil (CAO) is poised to benefit from the gradual recovery in jet fuel demand with China&rsquo s reopening.

 

Beyond this immediate catalyst, the increasing affluence of the Asia-Pacific region and burgeoning middle class in China will support the long-term growth of the regional aviation fuel market, making CAO an attractive multi-year investment story.

 

OCBC Securities made this call in its Aug 10 report, where it posted a $1.10 price target on the stock of the largest physical jet fuel trader in the Asia-Pacific region.

 

The latest price target is slightly below its earlier target of $1.12. Shares of CAO last traded at 92 cents on Thursday.

 

OCBC Securities analyst Ada Lim noted that CAO&rsquo s financial performance has been battered in recent years by the Covid-19 pandemic and an extended period of lockdowns due to China&rsquo s zero-Covid policy.

 

CAO&rsquo s revenue for the first half of the year ended on June 30 fell 32.4 per cent year on year to US$6.3 billion (S$8.5 billion) due to lower oil prices, a decline in total oil supply and falling contributions from associate companies and key subsidiary Shanghai-Pudong International Airport Aviation Fuel Supply Company.

 

But its net profit remained stable at US$19.4 million, just 1.1 per cent down from the previous year&rsquo s first-half profit of US$19.6 million. Also, the company was sitting on a strong cash position of US$534.4 million at end-June, with no interest-bearing debt on its books.

 

OCBC Securities noted that CAO remained a key supplier of imported jet fuel in the civil aviation industry in China, and a strong proxy for the growing Chinese aviation industry.

 

Being heavily dependent on international flights out of China, CAO suffered from lagging outbound travel recovery between January and June. Data from the Civil Aviation Administration of China showed that there were only 3,368 weekly international passenger flights as at the end of June, or some 44 per cent of pre-pandemic levels.

 

But according to online travel and booking platform Trip.com, searches for outbound flight tickets in the summer have exceeded the same period in 2019, which suggests a healthy appetite for outbound travel.

 

&ldquo Going forward, we expect policy support to promote further outbound travel recovery, given that the need to increase international flight capacity was explicitly mentioned at July&rsquo s Politburo meeting,&rdquo the report said.

 

Just this week, China announced the resumption of outbound tours to destinations including Australia, Britain, Germany, Japan, South Korea and the United States.

 

The investment house added that despite its difficult recent past, CAO remained well-positioned to capture the gradual recovery in jet fuel demand with China&rsquo s reopening, given its entrenched presence in China and status as a market leader in the region.

 

OCBC Securities expects CAO&rsquo s full-year earnings per share to grow 23.4 per cent to 4.8 cents per share in 2023, and another 27.6 per cent to 6.1 cents per share in 2024.

 

It expects the company to pay a dividend per share of 1.9 cents in 2023 and 2.7 cents in 2024.