PhillipCapital analyst Liu Miaomiao has downgraded China Aviation Oil (CAO) to “neutral” from “buy” after CAO declared a final dividend of 3.72 cents representing a payout ratio of 30%. There was also no special dividend.
Considering CAO’s earnings for the FY2024 ended Dec 31, 2024, increased by 33.13% y-o-y to US$78.4 million ($104.4 million), this was a disappointment to the analyst, who also lowered her target price estimate to 85 cents from $1.05 previously. CAO’s FY2024 earnings stood at 100% of her full-year estimates.
From its results announcement, Liu likes that CAO’s 33%-owned Shanghai Pudong International Airport (SPIA) continued to shine. During the year, CAO’s associates’ profits surged by 51.4% y-o-y to US$45.9 million, attributed to a recovery in international visitor arrivals. However, the group registered a 1.69% decline h-o-h in 2HFY2024 due to higher operating expenses.
“The growth in associates was primarily due to increased refuelling volume, which accounted for 59% of the group’s profit,” Liu notes.
In FY2025, the analyst expects the airport’s contribution to increase to around 90% of pre-Covid levels. In FY2024, CAO’s profit from associates remains at 70% of FY2019’s levels, lagging the international visitor arrivals which reached 84% of pre-pandemic levels as at December 2024, she points out.
That said, she also expects lower jet fuel prices to continue going into FY2025 given their strong positive correlation with oil prices.
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“The market anticipates downward pressure on oil prices due to Trump’s recent policies, such as easing Russia-Ukraine tensions, so the magnitude of profit growth may not be proportionate to the increase in refuelling volume,” says Liu.
The analyst also notes CAO’s lower margins from its trading business, falling from 0.1 percentage points h-o-h in 2HFY2024 and 0.13 percentage points y-o-y in FY2024.
“This decline was attributed to lower trading volumes on the Asia-North America route, impacted by Red Sea tensions that forced rerouting, incurring additional costs and longer transit times. Consequently, volumes for the Asia-North America route dropped sharply and gross margins declined by 80%,” she says.
With the anticipated contango oil market and downward pressure on oil prices, Liu expects trading volume to rebound in FY2025. Contango refers to a situation where the forward price – or futures price – of a commodity exceeds the expected spot price of the contract at maturity.
“Coupled with plans to resume two vessels per month on the Asia-North America route, we forecast improved margins for the trading business in FY2025,” Liu adds.
“CAO has further deepened its involvement in the supply chain by expanding into other segments of the trading supply chain such as vessel leasing and storage which is expected to boost margin further,” she continues.
As at the end of FY2024, CAO holds a net cash position of US$500 million with the company prioritising conserving cash to support an expansion in trading activities in FY2025. The group has no plans to return more capital to unitholders, she notes.
“While cash alone accounts for 89% of its total market cap, we are concerned that the discounted valuation may persist due to a lower-than-expected payout ratio,” she writes.
Liu adds that while she has maintained her patmi forecast for FY2026 to FY2027 at US$82 million and US$83 million, she has applied a 15% discount due to CAO’s underused cash reserves.
As at 3.48pm, shares in CAO are trading flat at 86 cents.
