Friday 29 Mar 2024
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SINGAPORE (Jan 17): CIMB has initiated coverage for China Aviation Oil with an “add” recommendation, as the group is believed to be the best proxy to China’s growing international air travel.

CIMB analysts Cezzane See and Lim Siew Kee pointed out that CAO is the only jet fuel importer to China, and supplies between 30% and 40% of China’s total jet fuel supply. CAO’s jet fuel supply is strictly used for outbound flights from China.

A large proportion of the group’s earnings come from Shanghai Pudong International Airport, for whom CAO is the exclusive refueller. With the airport’s fifth runway expected to be completed by end 2017 or 2018, and its satellite terminal to be completed by 2019, See and Lim expect the contribution from this segment to grow further.

“According to industry sources, once completed in 2019, the airport will be among the world’s top three and able to handle 80 million passengers in 2025, an increase of 30% from the 60 million it currently handles,” said the pair in a note on Monday.

Another area of growth for the group is expected to come from the group’s plans to grow its international trading network. As it stands, CAO has a trading network with 42 airports outside of PRC and has links with Los Angeles and Hong Kong International Airports. As of 1H16, the group’s international revenue contributed 51% to overall group revenue, and CIMB expects the global trading network to help boost group earnings moving forward.

To be sure, See and Lim noted that CAO has little debt, a net cash position of US$202.8 million (S$288.5 million) and could likely take on any acquisition opportunities if they arise. “CAO has an ambitious net profit target of US$110 million by 2020, and we believe it would not rule out M&A to reach its goal,” concludes the pair.

The brokerage has a target price of S$2 for CAO, which represents 13 times forward earnings and is still at a 20% discount to its peers who trade closer to 16.6 times forward earnings.

Shares in CAO are trading 2.5 Singapore cents higher at S$1.53 on Tuesday.

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