Company Overview: Qantas Airways Limited is an Australia-based company, which operates domestic and international airline. The Company is engaged in the operation of international and domestic air transportation services, the provision of freight services and the operation of a frequent flyer loyalty program. Its segments include Qantas Domestic, Qantas International, Jetstar Group, Qantas Freight, Qantas Loyalty and Corporate. The Qantas Domestic, Qantas International and Jetstar Group segments include passenger flying businesses. The Qantas Freight segment is engaged in the air cargo and express freight business. The Qantas Loyalty segment is engaged in the customer loyalty recognition programs. Its main business is the transportation of customers using two airline brands, which include Qantas and Jetstar. It also operates subsidiary businesses, including other airlines and businesses in specialist markets, such as Q Catering. Its airline brands operate regional, domestic and international services.


QAN Details

Decent Revenue Growth in 1HFY19; Capex Guidance Revised Upwards: Qantas Airways Limited (ASX: QAN) happens to be Australia’s leading domestic and international airline which is having a market capitalisation of around $8.86 billion as of March 25, 2019. The company’s annual dividend yield stood at 4.04% which can be considered at decent levels among peers amidst the competitive environment. It generated total revenues of $9,206 million in1H FY 2019 reflecting a rise of 5.8% on YoY basis. The company’s net passenger revenue amounted to $8,027 million in 1H FY 2019 which implies a YoY rise of 5.5% thanks to the group unit revenue which rose 5.7% and increased ancillary revenue. However, the group capacity (Available Seat Kilometres) witnessed a fall of 0.5% because of disciplined capacity adjustments which were made so that higher fuel costs can be addressed. The increases in fuel cost got significantly offset by the robust performance of revenues. The company posted a decent first half profit even though there was $416 million (27 per cent) rise with respect to the fuel bill. Its underlying profit before tax amounted to $780 million while the statutory profit before tax stood at $735 million. With respect to the key margins, the company is possessing decent position as its net margin stood at 5.4% in 1H FY 2019 which is higher than the industry median of 4.7% hinting towards the company’s better capability to convert its top line into bottom line as compared to the industry. Moreover, the group has increased net capital expenditure guidance of $1.6 Bn for FY19E from the prior guidance of $1.0 Bn, showing a rise of 60%. This will support the overall growth of the company in years to come.

Moving forward, the company might be aided by a robust balance sheet and its strong cash-generation capabilities. Also, the dual brand combination of Qantas and Jetstar might act as a key catalyst. The company is having the net debt amounting to $5.2 billion which happens to be at the bottom of the target net debt range of $5.2 billion- $6.5 billion.
 

1H FY 2019 Key Financial Metrics (Source: Company Reports)

Dual brand combination Aided Qantas Domestic: The company has managed to maintain its leading position with respect to domestic market and the business posted revenues amounting to $3,230 million in 1H FY 2019 while in 1H FY 2018 (on a reported basis), the revenues were $3,070 million. Overall, the performance of Qantas Domestic was aided by the disciplined capacity management which also includes an impact of increased pilot training. The business also managed to recover higher fuel costs. The dual brand combination of Qantas and Jetstar has supported in terms of market share and margin primarily because both the airlines have been delivering more for the customers. The domestic market happens to be well balanced. We expect that dual brand combination and uptick in passenger demand will support Qantas domestic business segment.
 

Qantas Domestic (Source: Company Reports)

Increase in Fuel Costs Weighed Over Qantas International: The revenues of Qantas International witnessed a rise by almost 7 per cent and stood at $3.7 billion in 1H FY 2019 but, in the same period, its EBIT encountered the fall by 60 per cent and stood at $90 million primarily because of a rise in the fuel costs. Amidst all these, the company is optimistic about the Qantas International’s fundamentals, and there are expectations that fleet and network transition would be helping in building earnings resilience. The segment has been witnessing the benefits from network changes that the company made about a year ago on Singapore, London, and the TransTasman. We expect that the segment would continue to be aided by robust fundamentals and transformation of the economics of the routes might attract the attention of the market players.
 

Qantas International (Source: Company Reports)

Frequent Flyer program Supported Qantas Loyalty: Qantas Loyalty delivered a strong performance in 1H FY 2019, and its profit rose by 4% and stood at $175 million because of fundamental strength of the Frequent Flyer program and the growth in retail partners, as well as revenue growth with respect to new ventures which includes health insurance and financial services. Qantas Loyalty posted total revenues amounting to $809 million. The result for the segment reflects the demand for Qantas Points and their ability to influence the consumer choice. Also, Qantas Loyalty happens to be on track to achieve the underlying EBIT target of $500 million-600 million by 2022.
 

Qantas Loyalty (Source: Company Reports)

Prudent Capital Deployment Towards Shareholders, Customers, and People: Qantas Group has maintained its focus towards satisfy its shareholders, customers and people. With respect to investors, the company has announced its plans for another $500 million for the shareholders which are made up of 12 cents fully franked dividend as well as a share buy-back. With regards to the customers, the company has been upgrading the experience with better lounges and aircraft. The company has extended its resident fare program in key regional communities. Finally, the company is offering opportunities for its people. With the help of new aircraft, there would be new training and promotion opportunities for the pilots, engineers and cabin crew.

Understanding QAN’s Capital Allocation Strategies: In 1H FY19, Qantas Airways witnessed net capital expenditure amounting to $1.0 billion which excludes aircraft operating lease refinancing. The net capital expenditure is related to three new 787-9 Dreamliners, reconfiguration and refresh programs for A321, A380 and Turboprop aircraft, upgradation of lounges as well as deployment towards transformation. We expect that the disciplined capital allocation strategies of the company would continue to support it moving forward and might also place it in a strong position to capture long-term growth opportunities. In this regard, the company has upgraded its guidance for net capital expenditure of $1.6 Bn for FY19 from the prior guidance of $1.0 Bn. The company has managed to wrap up an on-market share buy-back amounting to $332 million in 1H FY 2019. Also, since October 2015, the company has delivered >$3.6 billion of capital returns to the shareholders. We expect that the company’s focus on delivering returns to shareholders would continue to generate traction among the market participants and this also highlights its strong financial position hinting that the company is well-placed to tackle the challenges which might arise.
 
 

Shareholder Distributions (Source: Company Reports)

Buy-Back Event Updates: Qantas Airways had recently informed the market players about the on-market buyback in which is stated that they have bought back 8,702,619 shares for the consideration of $48,529,997.9. The company also stated that the shares having a total consideration of up to $305 million would be acquired under the buyback. The remaining consideration to be paid for shares under the buy-back is up to $256,470,002.14.

What Might Drive Growth for Qantas Airways Moving Forward: There are expectations that Qantas Group is in the robust position to deliver a robust performance in the 2H FY 2019 and to completely recover the higher fuel cost by the financial year-end. The company stated that its capacity is anticipated to be flat for 2H FY 2019. However, with respect to Qantas Domestic, the company is expecting continued growth in unit revenue but at a lower rate than 1H FY 2019.

There are anticipations that Qantas International capacity would be flat in the second half for FY 2019, but it might witness unit revenue growth which is expected to be higher than 1H FY 2019. In FY 2019, the company’s fuel cost is anticipated to be $3.90 billion. The transformation benefits are anticipated to be at least $400 million in FY 2019. The company also added that it is significantly flexible to respond to market conditions. Also, the company’s forward bookings happen to be strong. Qantas Airways is aware of the potential signs of weakness with respect to the economy and they are adjusting capacity to meet demand in the individual markets.

Stock Recommendation: In the past 6 months, Qantas Airways Limited’s stock has delivered a return of -8.40% while, in the previous one month, it posted -5.38% return. As a result, the company’s stock is trading slightly towards the 52-week lower level, thus, making it a decent buy opportunity. Over the long-term, the company’s stock is expected to be supported by the strong fundamentals and capital management initiatives. Also, from the valuations’ perspective, the company’s stock can be considered a decent buy as its P/CF (Price/Cash flow) ratio stood at 3.2x which is lower than the industry median (passenger transportation services) of 4.3x hinting that the stock is slightly undervalued.

Moving forward, the company is expected to be supported by decent cash-generation capabilities and by the disciplined capital allocation. Also, the company is focused towards delivering the returns to shareholders which might also help in attracting the investors. On the backdrop of aforesaid facts, we have a “Buy” recommendation on the stock at the current market price of A$5.400 per share. 
 
 
QAN Daily Chart (Source: Thomson Reuters)

 
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