Lim & Tan Securities Research has recommended buying China Aviation Oil (CAO) (SGX:G92) due to its impressive performance in FY23.
The net profit of CAO increased by 75.5% compared to the previous year, reaching US$58.9 million, which exceeded expectations by 117% of the estimate.
In spite of a 12.4% decrease in revenue to US$14.4 billion because of reduced oil prices and trade volume, gross profit rose by 43% to US$50.6 million, fueled by increasing benefits from jet fuel supply.
The company’s subsidiary, SPIA, in which it has a 33% ownership stake, also exceeded expectations by contributing US$31.5 million (+63.7% year-on-year). This was due to the increasing number of overseas flights.
To commemorate CAO’s 30th anniversary, the management announced a rise in annual dividends to 5.05 Singapore cents (compared to 1.6 Singapore cents in FY22).
This increase corresponds to a dividend payout ratio of 55% and a yield of 5.6%.
Lim & Tan Securities Research considers CAO’s prices appealing, given the possibility of future earnings growth. The dividends for FY23 were 5.05 Singapore cents (2.71 Singapore cents ordinary, 2.34 Singapore cents special).
This was considered a pleasant surprise, primarily because a special payout was included to commemorate the anniversary. The brokerage company sees the special dividend as a one-time event, and expects the ratio of dividend payouts to return to its usual norm of 30% in the future. CAO does not have any debt that accrues interest, and its cash balance has increased from US$308 million in FY22 to US$373 million as of the end of FY23.
With a solid financial position and an expected rise in jet fuel supply volumes, CAO is well positioned for future earnings growth.
Lim & Tan Securities Research has raised its profit predictions for FY24F by 10% due to higher demand for jet fuel, projecting a 23% gain in earnings for FY24F. They have a BUY rating on CAO with a higher target price of S$1.24, based on an 11.0x FY24F P/E (10% lower than the 5-year average P/E of 12.3x).