Brokers' take: DBS cuts target for China Aviation Oil after profits fall short
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AN unfavourable trading environment for crude oil and oil products is hurting margins at China Aviation Oil (CAO), and DBS Group Research now expects the jet fuel trader and supplier to take a longer time to recover to its pre-pandemic profitability levels.
In a research note released on Tuesday, analysts Jason Sum and Paul Yong noted a fall in CAO's gross profit per tonne of oil products supplied. This was partially due to backwardation in the market for oil products, i.e. current prices are higher than prices on the futures market.
CAO is also taking a hit from weaker traffic at Shanghai Pudong International Airport. It has a 33 per cent stake in the sole jet refueller at the airport.
For the half-year ended June, traffic was up year on year. But it was 17 per cent lower compared to the second half of 2020.
Both the gross margin pressure and the limited improvements in flight activity at Shanghai Pudong International Airport led CAO to miss DBS's net profit estimates for the first half.
Net profit of US$24.3 million was only 30.5 per cent of the analysts' full-year estimate.
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DBS has therefore cut its earnings estimates for FY2021 and FY2022 by between 13 and 26 per cent. It also trimmed its target price on the stock to S$1.20 from S$1.38 previously.
The analysts have, however, retained their "buy" call on CAO.
They believe international air travel recovery remains in sight, and should progress as vaccinations are rolled out. They expect CAO's supply volumes to pick up towards the end of this year.
They also noted CAO's net cash position of US$284.8 million, which they said would allow the company to undertake some mergers and acquisitions or boost shareholder distributions.
"The company highlighted that it is currently on the lookout for investment opportunities, but it remains to be seen if this will materialise due to CAO's patchy track record," they said.
Shares of CAO were trading at S$1.00 as at 2.25pm on Tuesday, unchanged from their close on Monday.
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