Qantas Airways Limited

QAN Details

ACCC Proposes to Retract Qantas/Japan Airlines Coordination Proposal: Qantas Airways Limited (ASX: QAN) operates in the aviation industry and provides airline services for international and domestic travel, as well as offers freight services. According to the announcement of 6 May 2021, ACCC has proposed to deny authorization of joint business agreement between Japan Airlines and QAN to safeguard other competitors and preserve healthy competition.

Key Financial Highlights of H1FY21: During H1FY21, total income stood at ~$2.33 billion against ~$9.46 billion in H1FY20. The underlying EBITDA stood at ~$86 million relative to ~$1,906 million in H1FY20 and statutory loss before tax stood to ~$1.47 billion relative to statutory PBT of ~$648 million in H1FY20. The decline in financial performance was primarily driven by COVID-19 restrictions and lockdowns across international and domestic borders which lead to an industry-wide operational unrest. Domestic airlines flew at ~30% capacity of H1FY19 (pre-COVID levels), while international airlines were mostly grounded.

Historical Operating Cash Flow Trend (Source: Company Reports)

Key Risks: The aviation industry took a significant hit since the onset of COVID-19 pandemic by operating at unprecedented capacities. Considering the highly cyclical nature of the industry, a significant decline in business and consumer demand further pushed down airline capacities. Other associated risks are volatile fuel prices and foreign exchange, calling for strategic risk management in place.

Outlook: QAN witnessed a rebound in domestic traffic and in the performance of loyalty and freight division as the industry is phasing out of COVID-19 scenario. As announced on 6 May 2021, QAN has completed its review of key facilities across Australia with an effort to cut overheads and involve a competitive process among states.  QAN expects to be free cash flow and underlying EBIT positive in H2FY21. For FY21, EBITDA is estimated around $400-450 million and statutory loss before tax to exceed $2 billion mark. QAN seeks strong consumer demand, including corporate travel, and expects to reach 95% of pre-COVID levels by Q4FY21 and international demand is expected to recognize an uptick post COVID-19 vaccination program. Freight segment continues to serve as a natural hedge for the declined passenger travel in FY21. Moreover, QAN is building up their operational efficiency to target at least $1 billion cost reduction. However, the recovery is subject to government initiatives and restrictions, hence causing COVID-19 related uncertainties.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last month, the stock of QAN went down by ~4.05%. The stock made a 52-weeks’ low and high of $3.120 and $5.790, respectively. The stock has a support level of ~$4.270 and a resistance level of ~$5.604. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of a modest upside of single-digit (in percentage terms). We believe that the company can trade at a slight discount as compared to its peer’s average considering high COVID-19 uncertainties and fierce competition. We have taken peers like Alliance Aviation Services Ltd (ASX: AQZ), Helloworld Travel Ltd (ASX: HLO), to name a few. Considering the increasing domestic & international demand, rising freight revenues, ongoing cost optimization strategies, and valuation, we give a ‘Hold’ rating on the stock at the current market price of $4.740, up by ~1.282% as on 21 May 2021.

QAN Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Webjet Limited

WEB Details

Key Financial Highlights of FY21 (Year-End Changed to 31 March 2021): Webjet Limited (ASX: WEB) is engaged in digital travel business of travel bookings, including flights and hotels. The company has two business segments namely, B2B (WebBeds) and B2C (Webjet OTA and Online Republic). During FY21, underlying revenue stood at ~$24.4 million relative to ~$387.7 million in FY20 and underlying EBITDA was negative ~$118.2 million against positive ~$141.6 million in FY20. With the onset of COVID-19 scenario, Bookings fell from ~$6.15 million in FY20 to ~$1.21 million in FY21. Similarly, TTV fell from ~$4,086 million in FY20 to ~$453 million in FY21. In April 2020, Webjet OTA’s domestic flight bookings in April 2020 were 95% of April 2019 levels. Similarly, Online Republic’s bookings were 48% of April 2019 levels. However, WebBeds continues to be affected by imposed restrictions on travel in several regions.

Monthly Performance (Source: Company Reports)

Latest Developments: On 1 December 2020, WEB announced to be a strategic partner of Qantas Airways Limited with a 3-year agreement which provides remarkable opportunity to collaborate on marketing and sales initiatives. As per 15 July 2020 announcement, Aeronology and WebBeds went into a strategic partnership agreement which enables WebBeds users with Aeronology application to book live WebBeds air booking inventory. On 30 June 2020, WEB announced the launch of Afterpay as a payment platform which enables customer with a range of payment merchants and methods. Recently, Mitsubishi UFJ Financial Group, Inc reduced its holding in the company from 12.33% to 11.15%.

Key Risks: WEB operates in a highly cyclical industry which poses a range of economic risks. The most prominent are COVID-19 pandemic and government restrictions. COVID-19 related uncertainties pose requirement of prudent risk management in place. With the ongoing international operations, WEB is also exposed to foreign exchange risk and high competition intensity.

Outlook: With the reopening of the US market, WebBeds has already achieved 83% TTV of April 2019 levels in April 2020. Similarly, Webjet OTA and Online Republic are approaching pre-COVID levels and with further re-opening of borders, the company expects increased bookings and profitability. WEB has developed a strong capital position by proactive engagement with banks to manage debt maturities and securing a $250 million convertible notes offering. Cost reduction strategies are underway, aiming to reduce costs by 20% once pre-COVID levels are reached.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Stock Recommendation: Over the last month, the stock of WEB went down by ~9.51%. The stock made a 52-weeks’ low and high of $2.630 and $6.330, respectively. The stock has a support level of ~$4.343 and a resistance level of ~$6.376. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of a modest upside of double-digit (in percentage terms). We believe that the company can trade at a slight discount as compared to its peer’s average considering uncertain COVID-19 scenario and high level of competition. We have taken peers like Corporate Travel Management Ltd (ASX: CTD), Helloworld Travel Ltd (ASX: HLO), Flight Centre Travel Group Ltd (ASX: FLT), to name a few.  Taking into account the current trading levels, re-opening of borders, rising bookings and TTV, and associated risks of COVID-19 related uncertainties and currency impact, we give a ‘Speculative Buy’ rating on the stock at the current market price of $4.910, up by ~5.364% as on 21 May 2021.

WEB Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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