CHINA AVIATION OIL(S) CORP LTD (SGX:G92)
China Aviation Oil - Stay Grounded
- China has limited the quantum of international flights to China while intense volatility could cap near-term trading activities. We lower our FY20-22F EPS of China Aviation Oil (SGX:G92).
- Despite China Aviation Oil's share price diving 32% YTD, we think it is too early to accumulate aviation/travel-related stocks aggressively.
- We reiterate our HOLD call and lower our Target Price, now based on a reduced 6.5x (close to its -1 s.d. from long-term average mean) on FY21F EPS.
Heightened slowdown in China’s air travel
- According to news articles, the Civil Aviation Authority of China (CAAC) is limiting the number of international flights to and from China, is directing Chinese carriers to maintain only one route to any country while limiting the number of flights to one per week, effective 29 March.
- Additionally, on 24 Mar 2020, the International Air Transport Association (IATA) updated that it estimated 2020’s Revenue Passenger Kilometers (RPKs) of Asia Pacific carriers to decline 37% y-o-y, higher than the 13% loss it estimated at end-Feb 2020.
- All these point to slower international jet fuel demand for China, at least in 1H20F, and lower refueling volumes in China Aviation Oil’s key associate, Shanghai Pudong International Airport Aviation Fuel Supply (SPIA), in our view.
Muted trading activities on oil product industry volatility
- China Aviation Oil’s trading activities are led by physical demand for the underlying product (minimal speculative trading) due to its rigorous trading risk mitigation policies. Given the near-term uncertainty with regards to demand for jet fuel and other oil products, trading activities could be capped, in our view.
Lower FY20-22F EPS warranted
- In the wake of the dramatic slowdown in global travel and uncertainties in the oil product industry, we now forecast a steeper drop in revenues, gross profits and SPIA earnings.
- We forecast FY20F EPS to fall 38% y-o-y but recover to grow 37% in FY21F. Overall, we cut our FY20F/FY21F/FY22F EPS forecasts by 25.6%/9.7%/6.2%.
Valuations closer to last trough but still too early; reiterate Hold
- China Aviation Oil is trading at 6x FY21F EPS (closer to trough of 4.4x forward PER in FY16, the previous crude oil crisis). Whilst this potentially prices in the downside risks in forward earnings, we think the near-term uncertainties, especially for the travel-related industries and oil product markets, make it too early to invest.
- As we still see China Aviation Oil as a longer-term proxy for China’s growing outbound travel and like its healthy balance sheet and FY21F dividend yield of c.5%, we reiterate our HOLD call.
- Our lower target price is now based on 6.5x FY21F P/E (from 8.5x previously), close to its -1 s.d. level from FY08-19 average mean.
- See China Aviation Oil Share Price; China Aviation Oil Target Price; China Aviation Oil Analyst Reports; China Aviation Oil Dividend History; China Aviation Oil Announcements; China Aviation Oil Latest News.
- Upside risks include a swifter recovery in China’s international travel, faster recovery in global travel and less uncertainty in the oil markets (which could translate to higher earnings).
- Downside risks include a prolonged Covid-19 impact and lower dividends.
Cezzane SEE
CGS-CIMB Research
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https://www.cgs-cimb.com
2020-04-01
SGX Stock
Analyst Report
0.86
DOWN
1.250
