"The company’s strength lies in its integrated network spanning procurement, logistics, and infrastructure," says Sum in his Oct 28 note.
CAO, he observes, is also an early adopter of sustainable aviation fuel (SAF) in Europe and parts of Asia, effectively leveraging its global supply expertise to meet the growing demand from airlines for lower-carbon fuel solutions.
Sum expects CAO to achieve mid-teens CAGR in earnings between FY2024 and FY2027, before tapering off slightly to high single digits between FY2025 to FY2027.
"This growth will primarily be driven by mid-single-digit increases in fuel volumes supplied, a gradual improvement in trading margins as backwardation narrows and a mild contango potentially returns, and persistent regional arbitrage windows.
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"We also expect a steady rebound in associate contributions, although SPIA’s earnings will remain constrained by ongoing US flight quotas," says Sum, referring to the Shanghai, CAO's main operating base.
On top of operating improvements, Sum is of the view that capital management will be a key re-rating catalyst for this stock.
CAO’s substantial net cash position, equivalent to nearly 60% of its market capitalisation, which implies inefficient use of capital.
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Given CAO’s steady cash flow generation and asset-light strategy, Sum believes that it can sustain a 60%-70% dividend payout, implying a yield of 7%-9%.
"Furthermore, there is potential for even higher payouts to strategically reduce its excess cash position.
"A more explicit and firm commitment to shareholder returns would unlock significant value and help narrow CAO’s valuation discount relative to its global peers," reasons Sum.
His target price of $1.75 is based on 10.8x FY2026 earnings, which is 1sd above its historical average.
"We see re-rating potential driven by enhanced earnings visibility, robust capital management catalysts, and an undemanding valuation," says Sum.
On the other hand, key risks include inventory losses amid price volatility, inefficient capital management prolonging its valuation discount vs peers.
CAO shares closed at $1.32 on Oct 28, unchanged for the day but up nearly 44% year to date.
