PHILLIP Securities has initiated coverage on China Aviation Oil : G92 0% (CAO) with a “buy” call and target price of S$1.01 on Monday (Oct 30) as the jet fuel trader reaps gains from international travel’s momentum.

Given that CAO’s operations are asset-light, the target price based on discounted cash flow model implies a return on invested capital to rise to 10 per cent in this financial year and 14.4 per cent in FY2024, compared to a 5.6 per cent in FY2022.

The research team also expects CAO’s earnings to double over the next two years. Around 64 per cent of CAO’s market cap, as at the end of 2022, was in net cash of US$308 million.

The coverage initiation came as international flight traffic rebounded, which the team expects to continue gaining momentum in 2024, boosting demand for jet fuel.

In particular, air travel volume surged by 80 per cent in the first eight months of 2023 – mainly driven by domestic travels – after Covid-19 mobility restrictions were lifted. International flights are still at 20 per cent to 30 per cent of pre-Covid levels.

“As more international flights are restored, we expect jet fuel demand at the major international airports in China to return to pre-Covid levels by FY2025,” said Phillip Securities’ research manager Peggy Ma.

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Ma added that China’s jet fuel consumption has grown by a compound annual growth rate (CAGR) of 8.4 per cent over the last 10 years, with a rising number of airports to cope with the increasing air travel demand.

She also noted that while China has been adding airports at a CAGR of 3.4 per cent, CAO could expand its footprint to more international airports in other Chinese cities.

CAO, which is 51.3 per cent state-owned, supplies imported jet fuel to the civil aviation industry in China. These include the major international airports with the heaviest aircraft traffic, such as Guangzhou Baiyun International Airport, Shenzhen Baoan International Airport and Shanghai Pudong International Airport.

Meanwhile, the three major Chinese carriers – Air China, China Eastern Air and China Southern Airlines – plan to grow their fleet in the next three years. This is underpinned by rising affluence and mobility, in addition to the enhanced urbanisation in China, which would further support air travel demand, said Ma.

CAO owns a 33 per cent stake in Shanghai Pudong International Airport’s exclusive refuelling operator, which contributes substantial earnings, accounting for 62 per cent of CAO’s net profit in FY2022.

While the China market accounts for a major share of its revenue at 53 per cent, CAO also markets jet fuel to airports outside China, and engages in international trading of jet fuel and other oil products as well as carbon credits.

“The share of the European markets has been rising steadily, as it steps up its presence through a trading arm in the UK and a 12.5 per cent stake in a concession holder at the Amsterdam Schiphol Airport”, said Ma.

Shares of CAO gained S$0.03 or 3.9 per cent to close at S$0.795 on Monday.