Brokers' take: RHB lowers CAO target price to S$1.09 on profit warning

RHB lowered its target price on China Aviation Oil (Singapore) Corporation (CAO) from S$1.13 to S$1.09 after the jet fuel company issued a profit warning stating it expects FY2021 profit before tax to decline by 26 per cent.

Following this announcement, analyst Shekhar Jaiswal on Thursday (Feb 3) lowered FY2021 to FY2023 earnings estimates for CAO by 3 to 11 per cent.

This comes after CAO's 33 per cent associate and main profit contributor, Shanghai Pudong International Airport Aviation Fuel Supply Company posted significantly lower earnings due to flight cancellations and disrupted operations from the resurgence of Covid-19 in H2 FY2021.

The new target price also incorporates RHB's new Brent crude oil price forecasts of US$83 per barrel from US$69 per barrel for 2022 and US$70 per barrel from US$65 per barrel for 2023. With these oil price estimates, the analyst increased 2022-2023 revenue projections by 9-20 per cent.

"In the near-term, oil prices could be fuelled by resilient oil demand and heightened geopolitical tensions that may result in supply disruptions which could threaten the global spare capacity," the report stated.

Additionally, Jaiswal believes that China's zero Covid-19 policy "remains a drag". With this policy, the analyst is of the opinion that China's traffic recovery, especially the international aviation traffic recovery, will remain uneven.

However, Jaiswal maintains his "buy" call on CAO as "valuation remains compelling". He is positive that profit will grow gradually with the recovery of aviation traffic over the next 2 years.

Shares of CAO traded up 2.1 per cent or S$0.02 to S$0.955 as at 1.22 pm.