DBS restarts China Aviation Oil coverage with ‘buy’ call; shares rise 12.9%

[SINGAPORE] Shares of China Aviation Oil (CAO) surged 12.9 per cent or S$0.17 to close at S$1.49 on Wednesday (Oct 29), after DBS re-initiated coverage with a “buy” call.

In a report issued in the morning, DBS analyst Jason Sum set a target price of S$1.75 for the counter.

Sum cited the normalisation of crude oil and jet fuel market structures, which is expected to lift trading profitability, as well as “persistent regional price differentials” that should continue to create arbitrage opportunities.

“Together, these trends underpin our earnings projections, which are 12 to 18 per cent above consensus,” he said in a note.

The target price is based on a 10.8 multiple of the forecast earnings per share for 2026, which represents one standard deviation above its historical average.

CAO’s profit contributions from its key associate, Shanghai Pudong International Airport Aviation Fuel Supply Co (SPIA), are poised for a continued rebound as international air traffic in China continues to recover, said DBS.

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SPIA is the sole supplier of jet fuel at Shanghai Pudong International Airport and is one-third owned by CAO.

Sum added that the group’s early strategic positioning in sustainable aviation fuel also provides “compelling medium-term growth optionality”.

“Most importantly, CAO’s substantial net cash balance and increasing imperative for capital discipline strongly position the company to significantly enhance shareholder returns through higher dividends,” said the analyst.

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“Together, these factors underpin a multi-year high-single-digit earnings compound annual growth rate and valuation upside potential.”

CAO is 51 per cent controlled by state-owned China National Aviation Fuel Group, which is the largest aviation transportation logistics service provider in China. BP Investments Asia, a subsidiary of oil giant BP, holds a 20 per cent stake.

CAO is Asia-Pacific’s largest physical jet fuel buyer and in August posted a net profit of US$50 million for the first half of its financial year. This was an 18 per cent year-on-year increase from US$42.4 million in the year-ago period.

Oil prices fell about 2 per cent on Tuesday, continuing a three-day trend, after the US sanctioned two of Russia’s biggest oil companies and the Organization of the Petroleum Exporting Countries planned to increase oil output again.