Stocks’ Details

Qantas Airways Limited

Long-term prospects but Fuel Cost is impacting performance: Qantas Airways Limited (ASX: QAN) updated about its Buy-Back Plan that as per its 21 February 2019 buyback scheme, the companyhas bought back a total of 2,30,80,317 shares via on-market trade for the total consideration of A$12,97,07,314.25 till 23 April 2019. The group intends to buy back remaining shares with an aggregate consideration up to A$175,292,685.75.

QAN recently updated about the resignation of Alison Webster as CEO of Qantas International, with her last working day being 24 April 2019. Mr Narendra Kumar, former CFO of Qantas International, would temporarily be acting in the role of Qantas International CEO.

Financial Performance in 1H FY19: Group Revenue for the period came in at $9,206 million as compared to $8,699 million, posting a growth of 6%. Underlying PBT of $780 million in 1H FY19 saw a decline of 19% YoY on account of higher fuel bill at $1,963 million (an increase of $416 million from 1H FY18). However, higher top-line supported the numbers and substantially offset the higher fuel costs.

Key Financial Highlights (Source: Company Reports)

Looking at the segment performance, Qantas Domestic witnessed strength and the dual brand combination of Qantas and Jetstar enjoyed leadership in terms of market share and margin. QAN intends to increase the capacity within WA by ~10% due to increasing demand outlook. On QAN International front, performance was hit by higher fuel cost resulting in a drop in underlying profit for this segment. QAN Loyalty witnessed 4% growth in bottom-line to $175 million, supported by Frequent Flyer Program, increasing retail partners and revenue growth from new ventures.

What to Expect: Thecompany is expected to see strong net free cash flow in second half with reduced fuel headwinds. Management expects capacity growth to be flat across domestic and international in 2H FY19. Fuel cost for FY19 is likely to come at $3.90 billion, up 21% compared to FY18, with ~2/3^rd of the increase occurred in the first half. Fuel for FY 2020 is fully hedged with 73% participation in favourable price movements.

Stock Recommendation: From the valuation standpoint, the stock is available at price to earnings multiple of 10.79x seems attractive as compared to its peer group – Aurizon Holdings Limited (at 19.15x) and Auckland International Airport Limited (at 15.31x). Net margin at 5.4% and ROE at 13.6% which are higher than the industry median of 4.8% and 4.1% respectively. The annual dividend yield for the stock stands at 3.92% with market capitalization at $9.02 billion as on 24 April 2019. Considering the bottom-line to be improved on the back of expected lower fuel cost, attractive valuations supported by strong fundamentals leads us to maintain our “Buy” recommendation on the stock at the current market price of $5.720 (up 1.961% on 24 April 2019).
 

Super Retail Group Limited

Segment Performances Remain Satisfactory:Super Retail Group Limited (ASX: SUL), one of the top 10 retailers in Australia, recently informed through Director’s Interest Notice that Anthony Michael Heraghty has acquired 417 shares of SUL for the consideration of $3,156.69 via issue of securities under Dividend Reinvestment Plan.

Financial Performance in 1H FY19:NPAT for the company stood at $71.7 million reflecting a fall of 0.7% (pcp) while normalised NPAT stood at $81.6 million reflecting a growth of 8.9% (pcp). Operating cash flow was robust and stood at $235.4 million. Net debt at $294.0 million was higher on account of debt funding of Macpac acquisition of $133.8 million in April 2018.


Group Results (Source: Company Reports)

What to Expect: Thecompany will focus on increasing market share to strengthen its position in the Australian retail market.The management has a plan for Macpac which was acquired to bring it in a leadership position.

Stock Recommendation: Looking at the valuation, the stock is trading at price to book of 2.1x which is lower than the industry average (Specialty Retailers) of 2.7x, showing undervalued position at the current juncture.Price to cash flow multiple (TTM basis) stands at 6.9x which is lower than the industry median of 7.9x. Considering the aforesaid factors and attractive valuations, we find the stock undervalued, hence, we maintain our “Buy” recommendation on the stock at the current market price of $8.490 per share (down 0.352% on 24 April 2019).
 

CYBG PLC

NIM at 2.17%, Above Industry Median: CYBG PLC (ASX: CYB) operates through the retail and commercial banks- Clydesdale Bank, Yorkshire Bank, and through the digital banking service B which was created in 2016. It notified in the recent update that Darren Pope, an independent Non-Executive Director, happens to be a Senior Independent Non-Executive Director and Chair of the Audit and Risk Committee of Network International Holdings plc.

Financial Performance in 1H FY19: The mortgage book at £24,540 million remains Group’s largest asset portfolio which posted 4.5% growth in FY18 with market share increased to 1.77% in FY18 from 1.73% in FY17. The group NIM in FY18 stood at 2.17% was lower than 2.27% in FY17 but broadly in-line with the guidance of c.220 bps given earlier. Underlying profit before tax at £331 million recorded a 12.96% growth. The company recorded statutory loss after tax of £145 million in FY18 against a profit of £182 million in FY17. Losses were primarily due to legacy conduct costs of £396 million in FY18.


Summary Income Statement (Source: Company Reports)

What to Expect: Acquisition of Virgin Money (one of the most powerful brands in the UK with 99% brand awareness) will lead to increased customer acquisition and retention. Management expects NIM for FY19 to be in the range of 1.6%-1.7%. Management expects underlying expenses for FY19 below £950 million.

Stock Recommendation: Looking at the relative valuation, the stock is available at price to book multiple of 0.6x, lower than the “Banking Services” industry average of 1.4x, seems attractive at current level.Credit growth at 4.9% is broadly in-line with the industry median of 5% whereas deposit growth at 4.3% is quite higher than 2.9% of industry median.

The stock has given return of 22.09% and 14.70% on YTD basis and 3-months basis, respectively. Considering the above-mentioned factors, and healthy fundamentals, we reiterate our “Buy” rating on the stock at the current market price of $4.000 per share (up 0.503% as on 24 April 2019).


Comparative Price Chart (Source: Thomson Reuters) 
 

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