China Aviation Oil recovery pushed back to FY 2022: DBS

DBS Group Research cut the jet fuel trader’s profit projections by 26% for 2021.

China Aviation Oil (CAO)’s net profit of $24.3m for the first half of the year was disappointing, DBS Group Research said in a report, as it formed only 30.5% of its full-year estimate for the largest physical jet fuel trader in the Asia Pacific region.

This led DBS to push back its projection for CAO’s recovery to the financial year of 2022.

“The underperformance during the period was largely attributable to an unfavourable trading environment (backwardation) for crude oil/oil products and limited improvement in flight activity at Shanghai Pudong International Airport (SPIA),” DBS said in a brokerage report.

This was one of the factors that led DBS to cut CAO net profit estimates by 26% for 2021 and 13% by 2022, to reflect the core margin compression and gradual recovery trajectory at SPIA.

For the near term, CAO is expected to be hit by the slow easing of international borders as the pandemic continues.

“CAO’s supply volumes should start to pick up more meaningfully towards late 2021 as international flights should gradually resume with continued progress on vaccination in key aviation markets. However, the profitability of CAO’s trading segment will likely suffer from the prolonged ‘backwardation’ structure in the crude oil market,” DBS said.

It continued to be bullish on the recovery trajectory for CAO and SPIA, adding that its earnings forecasts for 2021 and 2022 continue to be higher than the consensus.