CHINA AVIATION OIL(S) CORP LTD (SGX:G92)
China Aviation Oil - Aviation Traffic Recovery Delayed; Now NEUTRAL
- We lower China Aviation Oil (SGX:G92)'s 2020F-2022F profit by 26%-27% to account for a delay in China’s aviation traffic recovery.
- While China’s domestic aviation traffic continues to register m-o-m improvement, the resurgence of COVID-19 infections will push international traffic recovery to 2021. This would impact earnings for Shanghai Pudong International Airport Aviation Fuel Supply (SPIA), which accounted for 65% of China Aviation Oil’s 2019 PBT.
- While valuations remain compelling, we now prefer to wait for clear signs of traffic recovery.
Aviation traffic in China continues to improve sequentially.
- Although China is still witnessing y-o-y decline in passenger aviation traffic, it has seen a sharp m-o-m passenger traffic revival since the low of Feb 2020. Amidst COVID-19, China’s passenger aviation traffic had declined to 8.3m in February from 50.6m in January.
- Since February, passenger aviation traffic has improved each month, reaching 36.9m in July. Much of this improvement has been driven by the revival in domestic air travel.
International aviation traffic recovery to be delayed.
- SPIA, the exclusive aircraft refuelling service provider at Shanghai Pudong Airport (SPA), is China Aviation Oil’s 33%-owned associate. At SPA, domestic aircraft movements have increased to c.16k in June from the low of c.7k in February. This compares with an average monthly domestic aircraft movement of c.22k in 2019.
- For international traffic, aircraft movement has remained unchanged since February, at c.7k vs a c17k monthly average in 2019. We note that the average number of passengers per international flight at SPA in 2Q20 was less than 10, implying near-term downside risks to international aircraft movements at SPA.
Strong cash position.
- China Aviation Oil received USD59.7m of dividends from SPIA in 1H20, paid in arrears from last year’s earnings. Thanks to this, and positive FCF generation in 1H20, China Aviation Oil’s net cash position stands at USD406.7m, accounting for c.70% of its market cap.
- We had highlighted in an earlier report that China Aviation Oil’s parent plans to expand its global presence in next few years. See China Aviation Oil - RHB Invest 2020-06-12: Improving Chinese Aviation Traffic; BUY. For this purpose, China National Aviation Fuel plans to leverage on China Aviation Oil’s international presence.
- We maintain that China Aviation Oil could use its large cash balance for an earnings accretive acquisition, should an opportunity arise.
Compelling valuations; waiting for signs of traffic recovery.
- Although China Aviation Oil’s 2021F 8.5x P/E is below the range of multiples of its global jet fuel-supplying peers, and implies only 0.3x 2021F PEG, the likely delay in international aviation traffic recovery – due to the resurgence of COVID-19 infections – has increased downside risks to near-term earnings.
- Downgrade to NEUTRAL, with SGD0.95 Target Price from SGD1.25, 2% upside and 3% 2021F yield.
- 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.
Shekhar Jaiswal
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-08-13
SGX Stock
Analyst Report
0.95
DOWN
1.250
