DBS lifts China Aviation Oil target price to S$2.50 on arbitrage opportunities

[SINGAPORE] DBS analysts raised their target price for China Aviation Oil (Singapore) Corp (CAO) to S$2.50 on Tuesday (Mar 17), up from S$1.75, following “convincing” better-than-expected earnings for the 2025 financial year.DBS Group Research analyst Jason Sum maintained a “buy” call on the jet fuel trader, citing a 14 per cent beat in FY2025 net profit, which reached US$110.6 million. The outperformance was primarily driven by gross profit per tonne surging to US$4.7 in the second half of 2025, a 77 per cent increase year-on-year.Sum cites the firm’s multi-year earnings growth as underpinned by resilient demand, and said that its near term is supported by favourable trading conditions.“Trading margins are likely to remain elevated into 2026, supported by ongoing volatility and cross regional dislocations, before moderating over time as supply chains gradually rebalance,” he said.The Middle East conflict has disrupted supply flows, pushing jet fuel markets into the “steepest backwardation in recent years” while regional price spreads have widened to levels exceeding those seen during the Russia-Ukraine conflict, he said.Yet, Sum noted that while “backwardation and higher air fares are negatives,” they are expected to be “more than offset” by widening cross regional spreads and heightened volatility. “The group has conducted extensive internal war-gaming around potential conflict scenarios. The management indicated that it has modelled a range of outcomes, including disruptions lasting four weeks, eight weeks or up to three months, with corresponding operational and trading responses prepared for each case,” he said. “This scenario planning allows the trading team to respond quickly to shifts in supply flows, regional price spreads and cargo availability,” Sum added.The strategy “continues to prioritise the stability of the physical cargo franchise, with trading activity focused on capturing dislocations created by volatility rather than taking speculative positions”.While volumes supplied could underwhelm if higher jet fuel prices begin to dampen air travel demand, the same supply disruptions are “tightening availability and fragmenting regional markets, which should strengthen CAO’s commercial positioning”. Sum further noted that CAO’s net cash position of US$683 million accounts for nearly 50 per cent of its market capitalisation, highlighting “clear capital inefficiency” that provides scope for a re-rating once addressed.While the final dividend of 4.96 Singapore cents was described as “underwhelming” against the earnings beat, DBS expects the group can eventually “sustain a 60 per cent to 70 per cent payout, implying a yield of 5 per cent to 8 per cent” once parent-level restructuring constraints are lifted.