Turning neutral on the stock
- Downgrade to HOLD with lower TP of S$0.85 to reflect negative earnings revisions and less optimistic outlook
- 2H21 net profit estimate below expectations
- Final DPS of 1.90Scts also missed estimates
- Net cash position improved, but we do not see a clear path to enhancing shareholder returns
Investment Thesis:
Protracted backwardation in crude oil/oil product market will erode profitability. Improving crude oil demand and concerns of supply disruption amid sanctions on Russia, the world’s second largest exporter of crude oil, drove backwardation in the crude oil market to the steepest level since 2004. We believe that the crude oil/oil product market will remain tight for some time, making it challenging for the group’s trading operations.
Delayed reopening of China’s international market will be a drag on earnings. CAO’s key associate, Shanghai Pudong International Airport, which typically accounts for more than half of its earnings, is highly dependent on international traffic. Hence, the sluggish relaxation of international border controls will likely impede SPIA’s earnings recovery.
Substantial net cash position, but no clear path to enhancing shareholder returns. CAO had net cash of US$401m as of December 2021, representing S$0.63 per share. Though CAO’s net cash position is substantial, we are doubtful on the group’s ability to put that capital to work in a manner that would drive shareholder returns.
Valuation:
Our TP of S$0.85 is based on 11.0x FY22F earnings, which is at +1.0 standard deviation above its five-year mean.
Where we differ:
Our forecasts for FY22/23F are lower than the consensus, as we are less bullish on the recovery trajectory for CAO and its key associate SPIA.
Key Risks to Our View:
Sustained weaker demand for international air travel would negatively impact CAO’s revenue and earnings. A sharp drop in oil prices would lead to mark-to-market losses for its key associate SPIA, which would impact its contribution to CAO.