Broker's take: DBS raises China Aviation Oil target price as air traffic recovers

DBS Group Research maintained its "buy" call on China Aviation Oil (CAO) and raised its target price to S$1.38 from S$1.20. This comes on expectations of a strong recovery in China's domestic air travel and improvements in international air travel as vaccination efforts continue.

In a research note published on Monday, analysts opined that CAO deserved a higher valuation as they estimate an ex-cash price-to-earnings (PE) ratio at less than three times for FY2021.

They foresee that CAO would benefit from higher departing frequencies at the Shanghai Pudong International Airport (SPIA) and the sustained improvements in international air travel.

Analysts estimated SPIA's departing frequencies at 70 per cent of its pre-Covid-19 levels. They believe that it will continue improving as China plans to vaccinate 50 million people by early February 2021, ahead of the Chinese New Year peak travel season.

This means that CAO's earnings are likely to improve materially, given that the airport typically accounts for more than half of the company's earnings, said the analysts.

The research house also expects that the jet fuel supplier will benefit from improvements in international air travel as vaccines are made available in key aviation markets.

They added that share prices could rerate further if the company can make a significant earnings-accretive acquisition.

"With the worst for the aviation sector likely behind us, we value the company based on 11 times (plus-one standard deviation of its mean) FY2021 PE as earnings are set to recover firmly in the next 12 months," the analysts said.

However, a sustained weaker demand for international air travel and a sharp fall in oil prices could affect CAO's earnings, the analysts warned.

CAO shares fell 0.84 per cent or S$0.01 on Tuesday to close at S$1.18.

BT is now on Telegram!

For daily updates on weekdays and specially selected content for the weekend. Subscribe to t.me/BizTimes