Its trading profitability is expected to rise, while arbitrage opportunities are set to persist

 

[SINGAPORE] Shares of   China Aviation Oil (CAO)   : G92 +12.88% surged as much as 9.1 per cent on Wednesday (Oct 29) after DBS re-initiated coverage with a &ldquo buy&rdquo call. 

 

The counter rose as high as S$1.44 as at 2.20 pm, having ended Tuesday S$0.02 down at S$1.32. In the DBS report issued in the morning, analyst Jason Sum set a target price of S$1.75 for CAO.

 

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

 

&ldquo Together, these trends underpin our earnings projections, which are 12 to 18 per cent above consensus,&rdquo 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&rsquo 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.

 

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&rsquo s early strategic positioning in sustainable aviation fuel also provides &ldquo compelling medium-term growth optionality&rdquo .

 

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

 

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

 

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

 

It is Asia-Pacific&rsquo 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&rsquo s biggest oil companies and the Organization of the Petroleum Exporting Countries planned to increase oil output again.

 

PhillipCapital analyst Liu Miaomiao has upgraded her call on China Aviation Oil (CAO) to &ldquo buy&rdquo as the company&rsquo s 1HFY2025 patmi was up by 17.99% y-o-y to US$50.0 million ($64.2 million).

 

&ldquo We upgrade CAO from &lsquo accumulate&rsquo to &lsquo buy&rsquo with a higher discounted cashflow (DCF) target price of $1.50 underpinned from surging jet fuel demand and rising contributions from associates,&rdquo Liu writes in an Aug 18 report. Her previous target price was 90 cents.

 

Revenue for the six months ended June 30 increased by 13.6% y-o-y to US$8.56 billion due to higher business volumes. At the same time, gross profit grew by 25.7% y-o-y to US$30.4 million mainly due to higher profits from CAO&rsquo s jet fuel supply business. The business itself saw higher supply volumes and higher optimisation gain from trading activities, said the company in its results announcement released on Aug 14.

 

Share of results from associates for the 1HFY2025 also rose by 18.58% y-o-y to US$27.4 million mainly due to higher contributions from Shanghai Pudong International Airport (SPIA) and Oilhub Korea Yeosu Co., Ltd (OKYC). SPIA&rsquo s contributions were up 13.9% y-o-y to US$25.5 million, notes Liu. Aside from SPIA, share of results from other associates surged by 156% y-o-y to US$1.95 million, due mainly to higher contributions from OKYC.

 

To Liu, increasing contribution from SPIA is a plus, with passenger traffic for the 6M2025 up by 6% y-o-y to 371.68 million, surpassing pre-Covid-19 levels by 5%. Passengers on international routes surged by 24.7% y-o-y to 42.85 million while international visitor arrivals rose by 29% y-o-y in June.

 

The analyst says she expects higher arrivals from 2H2025 due to increasing inbound demand as the renminbi (RMB) depreciates against major global currencies like the US dollar (USD) and British pound (GBP).

 

To this end, she expects SPIA to bring in a full-year contribution of US$50.8 million, 77% of its FY2019 levels and contributing to CAO&rsquo s FY2025 patmi.

 

Liu is also positive on the increasing trading volume with higher margins.

 

In the 1H2025, trading volume was up by 35.4% y-o-y to 13.77 million metric tonnes (MT), driven by robust jet fuel demand.

 

&ldquo CAO is capitalising on China&rsquo s oversupply by reselling at higher prices to markets such as Europe and the rest of Asia,&rdquo Liu notes.

 

&ldquo Gross profit margin improved marginally by 0.03 percentage points to 0.35%, supported by increased SAF (or sustainable aviation fuel) trading, which currently accounts for a low single-digit share of total trading volume,&rdquo she adds.

 

With this, the analyst expects margins to expand in 2HFY2025 as CAO deepens its presence in SAF segment, which typically yields higher margins of three times to five times compared to conventional jet fuel.

 

In FY2026 and FY2027, Liu has raised her patmi forecasts by 5.7% and 4.8% to US$85 million and US$88 million respectively, which reflects stronger-than-expected growth in jet fuel demand and associate profits.

 

&ldquo CAO maintains a net cash position of US$515 million, representing 66% of its total market cap,&rdquo she says.

 

While there were no negatives, the underutilisation of cash and lower trading volumes in 2H2025 were highlighted as key downside risks.