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

Capacity Discipline Witnessed in Domestic Market: Qantas Airways Limited (ASX: QAN) happens to be an ASX listed company which is engaged in the operation of international and domestic air transportation services. As on July 8, 2019, the market capitalisation of the company stood at ~$8.98 billion. The company had earlier released its results for six months to December 2018 in which the company reported underlying profit before tax (or PBT) amounting to $780 million for the six months ended December 31, 2018, reflecting a fall of $179 million from 1H FY 2018. The company had delivered a decent first-half profit even though there was a $416 million (or 27%) rise in the fuel bill. The company stated that reduction in the gap between increased fuel bill and fall in the earnings reflects that the company had succeeded in significantly recovering much of higher fuel cost with the help of 5.7% increase in the unit revenue, which got supported by the disciplined capacity management. Moreover, the decent revenue performance supported the company to deal with an increase in the non-fuel costs, which includes the impact of weaker Australian Dollar and higher commission costs. The company stated that there was a rise in the selling costs, simply because of commissions which were associated with a 6% increase in the revenue, as well as costs linked to the weaker Australian dollar. However, the company had made progress against the long-term strategy. Qantas added that it is mindful of the potential signs of weakness in the broader economy and they always keep adjusting the capacity in order to meet the demand in the individual markets.
From the analysis standpoint, the company's top-line and bottom-line have grown at a CAGR of ~2.6% and 20.7%, respectively, over the period of FY15-FY18. We presume that this decent growth on CAGR basis in its top line and bottom line (FY15- FY18) and focus on deleveraging the balance sheet via reduction of debt might attract the attention of the market players.
 

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

Top 10 Shareholders: The following table provides a broader overview of the top 10 shareholders in Qantas Airways Limited:

Top 10 Shareholders (Source: Thomson Reuters)

Decent key metrics in 1HFY19 than the industry median: The key financial ratios of Qantas Airways Limited are higher than the industry median, which reflects relatively better performance than the broader industry. Its net margin stood at 5.4% in 1H FY 2019, which is higher than the industry median of 4.8% that reflects that it has been effectively converting its top line into the bottom line. The company’s gross margin in 1H FY 2019 stood at 54.1%, which is higher than the industry median of 41.1%.


Key Metrics (Source: Thomson Reuters)

The company’s current ratio stood at 0.41x, which is higher than the industry median of 0.37x that reflects its decent liquidity position as compared to the concerned industry. The company witnessed a respectable CAGR growth of 1.92% in its cash receipts (FY 2014- FY 2018). It is possessing decent operational capabilities, which is evident from the CAGR growth of 33.67% in its cash from operating activities (FY 2014-FY 2018).

A Quick look on Qantas Domestic Business: Qantas Airways Limited stated that Qantas Domestic business witnessed an EBIT amounting to $453 million, which is 1% higher than the same time last year. It was also mentioned that capacity continues to be adjusted in line with the demand in the different markets. With respect to Domestic business, the company stated that a dual brand combination of Qantas and Jetstar is having a significant leadership in the market share as well as margin.  Jetstar’s domestic result got helped by the increase of average load factor to 87.8 as well as an 11% rise in the ancillary revenue per passenger. The company added that it has been maintaining its leading position in the domestic market.


Qantas Domestic (Source: Company Reports)

Qantas International’s revenue witnessed a rise: Qantas stated that, internationally, the performance got significantly impacted by the increased fuel costs, largely because of long-haul nature of the network and effect that has on fuel burn. Even though there was an increase in revenue, Qantas International witnessed a decline in the underlying profit, mainly because it had to cope with the fuel bill which witnessed a rise of $219 million. However, the company happens to be very positive with respect to the fundamentals of Qantas International. The revenue of Qantas International witnessed a rise by around 7% and stood at $3.7 billion but EBIT witnessed a fall by 60% and stood at $90 million.


Qantas International (Source: Company Reports)

The company added that Qantas International has been witnessing the benefits from the network changes that were made around a year ago on Singapore, London, and the TransTasman.

Focused on Disciplined Allocation of Capital: The balance sheet of the company remains robust with net debt of $5.2 Bn, which is at the bottom of the target net debt range of $5.2 billion- $6.5 billion. The 1H FY 2018benefited from the reduced outflows while 1H FY 2019 witnessed additional outflows to hedge the company’s 2019/20 financial year fuel cost. The company’s financial framework happens to target an optimal capital structure in order to achieve the lowest cost of capital. The following chart provides a broader overview of the company’s capital allocation priorities:


Capital Allocation Priorities (Source: Company Reports)

The company added that capital allocation decisions, which includes distributions to the shareholders, are sized in order to ensure that net debt remains within target net debt range on a forward looking basis. The company’s optimal capital structure happens to be consistent with investment grade credit metrics.

Key Takeaways from Q3 FY19 Trading Update: The company delivered revenue growth in Q3 FY 2019 as it remains on track to fully offset the impact of significantly higher fuel costs as compared to the last year. The company stated that total revenue between January 1 and March 31, 2019 witnessed a rise of 2.3% to $4.4 billion and group unit revenue increased by 4%. Further, the company added that group domestic unit revenue witnessed a rise of 1.1%, which is in line with the expectations given Easter timing shift. Ongoing strengthening in the resources market more than offset a weakening of demand in other parts of the corporate market.

Qantas and Melbourne Airport reached an agreement with regards to the sale of airline’s domestic terminal. Qantas had settled the sale of the terminal and secured future access to Terminal 1 for the consideration amounting to $355 million, out of which $276 million would be received in cash in this financial year, while remaining value to be accrued in the future periods. With respect to capital management update, the company had stated that the share buyback of up to $305 million, which was announced in February 2019, was 54% complete as at May 6, 2019, and 29,477,272 shares have been acquired. As a result of this, the total number of shares on issue after cancellation stood at 1,596,171,725.

What to Expect from QAN Moving Forward: The CEO of the Group named Alan Joyce is of the view that 3Q FY 2019 figures reflected that the national carrier remained in the fundamentally strong position.  It was also mentioned that the company has been performing well, and the strength in the key parts of the portfolio are helping to hedge against the headwinds in other areas. The CEO also added that, domestically, the demand happens to be mixed. The resources sector had been growing and the company is capitalising on that with a lot of extra flying in Western Australia as well as Queensland.

Overall, there are expectations that the company would be able to achieve the record level of revenue this financial year and robust cash flow. In the media release dated February 21, 2019, the company stated that, considering the strong forward revenue projections, reduction in the fuel headwinds as well as continued transformation, there are expectations that the company would be able to generate strong net free cash flow during 2H FY19. There are expectations that the group capacity growth would be flat throughout domestic and international in 2H FY19. The company also stated that FY19 fuel costs are anticipated to be around $3.90 billion, which reflects a rise of 21% as compared to FY18.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Approach

  EV/Sales Multiple Approach (Source: Thomson Reuters), NTM: Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation: Talking about the past performance, the stock of Qantas Airways Limited had delivered the return of 5.34% in the span of the previous one month, which might be considered at respectable levels. With respect to revenues in 1H FY19, the company witnessed a rise of 6% in net passenger revenue. It also witnessed a rise of 15% in the net freight revenue, which was because of a rise in the global demand. The company had also announced two key changes with respect to the Group leadership team. It was mentioned that Tino La Spina, would be moving to become the Chief Executive Officer (or CEO) of Qantas International. Also, Vanessa Hudson, who is presently the Group’s Chief Customer Officer, would be moving to the role of the Chief Financial Officer. The changes would be taking effect from October 1, 2019.

The company stated that FY19 transformation benefits are expected to be at least around $400 million. Also, the capital expenditure net of asset sales has been anticipated to be $1.6 billion for FY19, and $1.0 billion of this had been spent in 1H. Considering decent operational capabilities coupled with a focus on the disciplined capital allocation and deleveraging the balance sheet, we have valued the stock using Relative Valuation method, EV/Sales and arrived at the target price of A$6.40 per share (double-digit upside (%)). Moving forward, there are expectations that higher key financial ratios as compared to the industry and respectable annual dividend yield of 3.85% might attract the attention of market players. Given the backdrop of aforesaid parameters, we give a “Buy” recommendation on the stock at the current market price of A$5.670 per share (down 0.874% on 8 July 2019).

 
QAN Daily Chart (Source: Thomson Reuters)

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.