• This week, CGS-CIMB analysts drew attention to the potential profit upside of 2 aviation-related businesses  -- Singapore Airlines and China Aviation Oil. The 2 have shown very different profit profiles in recent past, though.

• While SIA has seen its profit hit a record high, CAO has yet to recover much for which very reason the latter's stock may be the one with greater upside.

Logical? Their businesses are very different except for one key fact -- they rely on aviation travel.

• CGS-CIMB's target prices for SIA and CAO are $6.91 and $1.14, respectively. They represent 7.5% and 33% upside, respectively.
Read excerpts of the broker's report on why CAO gets its "Add" rating.

: Kenneth Tan & Lim Siew Khee  

China Aviation Oil  -- Likely a strong 2H23F showing

■ We expect CAO to report a 2H23F net profit of US$26m (+88% yoy), driven by increased trading activities and rebounding associate profits.


Share price: 


■ For FY24F, we forecast EPS growth of 57% yoy, driven by a further recovery in China’s outbound flight volumes to 80% of 2019 levels by end-2024F.

■ Reiterate Add at an unchanged TP of S$1.14, still pegged to 10x FY24F P/E (FY10-19 average).
Current valuation is attractive at 8x FY24F P/E.

CAO overview3.23

2H23F: EPS rebound driven largely by outbound travel recovery


We expect CAO to announce its 2H23F results in the last week of Feb 24. We forecast 2H23F net profit to rebound to US$26m (+32% hoh, +88% yoy), driven by an improved trading environment and rebounding contribution from associates.

We think 2H23F gross profit should recover off 1H23 lows to US$14m (+28% hoh, flat yoy) on the back of
1) c.50% yoy increase in jet fuel trading volumes, in line with recovering China outbound flights, and
2) more trading opportunities.

As crude oil prices showed better stability in 2H23F compared to 1H23, we think CAO’s traders were able to capitalise on more margin optimising trading opportunities in the second half.

We forecast 2H23F share of associates profits to rise 75% hoh and 76% yoy, as 33%-owned associate SPIA likely benefitted from strong passenger throughput growth at Pudong Airport.

Outbound flight volumes from China set to grow further in 2024F


As of end-Dec 23, China’s outbound flight volumes (measured by seat capacity) stood at 64% of 2019 levels, while domestic flight volumes have exceeded 2019 levels.

As announced on 4 Jan 24, the Civil Aviation Administration of China expects international flight volumes to hit 80% of pre-Covid levels by end-2024F, giving us greater certainty of travel recovery ahead.

While domestic economic weakness and visa issues have resulted in international flight volumes recovering slower than we had previously anticipated, we think 2024F volume recovery will be driven by

1) eased visa restrictions for tourists entering China,
2) complete lifting of Covid-19 restrictions within China, and
3) further restoration of flight routes between China and laggard countries (notably US and Japan).

Reiterate Add on healthy EPS growth and decent valuation


Over the past year, CAO’s share price has fallen 9% on concerns over slow recovery in China international flight volumes, resulting in its forward P/E multiple de-rating from 12x to 8x currently (0.7 s.d. below FY10-19 historical mean).

KennethTan 9.23Kenneth Tan, analystReiterate Add as we still like CAO for its robust earnings growth trajectory ahead, which could help re-rate the stock back to its historical average of 10x FY24F P/E, in our view.

Our TP is unchanged at S$1.14, still based on 10x FY24F P/E.

Re-rating catalysts include strong GPM improvement from increased trading activities, and quicker improvement in China’s international flight volumes.

Key downside risks include a slow recovery in China’s international flight volumes, recessionary fears triggering a slowdown in global travel, and an unfavourable trading environment impacting CAO’s trading activities.

Full report here.

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