UBS: Raise target price of BOC AVIATION (02588) to 106.9 Hong Kong dollars, dividends exceed expectations.

UBS released a research report stating that BOC AVIATION (02588) has slightly raised its profit forecast for 2026 to 2028 by 1% to 4%, mainly assuming an increase in profit margin from selling aircraft, but partially offset by slightly lower rental income assumptions. The bank expects capital expenditure to increase from $4.2 billion in 2025 to $4.5 billion in 2026, and to maintain $5 billion annually from 2027 onwards. Taking into account a higher dividend policy, the bank has raised its dividend forecast for 2026 to 2028 by 15% to 19%, and its target price from HK$96.9 to HK$106.9, based on a forecast price-to-book ratio of 1.3 times, and reiterated a "buy" rating. The group's net profit in 2025 was $787 million, a 15% decrease year-on-year, mainly due to a decrease in non-recurring income related to Russian aircraft. Excluding one-off items, core net profit last year was $746 million, an 18% increase year-on-year, and surpassed the bank's and market expectations. The dividend was a major surprise in performance, with the dividend ratio increasing from 35% in 2024 to 40%, and the dividend per share of approximately $0.45 exceeded expectations, yielding 4.6% at the current price. The report mentioned that the Middle East conflict has disrupted operations of airlines in the region, with rising fuel prices and some Middle Eastern countries closing their airspace. The company stated that 25 aircraft (9% of its fleet) are leased to six financially stable airlines in the Middle East region, and are fully insured. The situation in the Middle East remains unclear, and its duration will determine changes in credit risk for its airline customers. In the medium term, management remains confident in leasing demand, expecting aircraft supply shortage to continue until the end of the 2020s. Delivery volumes have significantly improved, allowing for more new lease agreements to benefit from the current favorable pricing environment.