Stocks’ Details

Qantas Airways Limited

Strong 1H FY19 Results, Despite Higher Fuel Costs: Qantas Airways Limited (ASX: QAN) is engaged in the business of international and domestic air transportation services. The company, as on 9 May 2019, updated that Michaela May has been appointed an Assistant Company Secretary of Qantas Airways Limited.

The Group released a trading update for 3Q FY19 stating that total revenue grew by 2.3% to $4.4 billion(pcp) and Group Unit Revenue grew by 4%. The company was able to deliver revenue growth in the third quarter of FY19 with its continuous effort to fully offset the negative impact of higher fuel costs in the current financial year as compared to FY18. The significant amount of Easter effect on revenue will be seen in 4Q FY19, also supported by favourable alignment between public holidays and school holidays.


Quarterly Market Update (Source: Company Reports)

Outlook:The management expects for a stronger 2^nd half of FY19 with fuel cost to be recovered completely by the end of FY19. Domestic capacity of the Group is likely to remain flat for 2H FY19with Unit Revenue growth to continue albeit at a lower rate as compared to 1H FY19. Similar to domestic, International capacity is projected to be flat for 2H FY19. With the moderated capacity additions by competitors, higher Unit Revenue growth is expected in 2H FY19 as compared to 1H FY19. The management expects to generate significant net free cash flow in the second half of FY19 with expected fuel cost for FY19 at $3.90 bn.

Stock Recommendation: At the current market price of $5.560, the stock is trading at price to earnings multiple of 10.460x with a dividend yield of 4.04%. Looking at the historical price movement, the stock has given a negative return of 13.24% in the last 1-year. Considering the growth to be maintained in the second half despite higher fuel costs, strong fundamentals, comfort valuations, etc., we give a “Buy” rating on the stock at the current market price of $5.560 per share (up 2.206% on 09 May 2019).
 

Tabcorp Holdings Limited

Bigger Player In Gambling Space With the Combination Of Tatts Group: Tabcorp Holdings Limited (ASX: TAH) is engaged in the business of gambling and entertainment services. On the completion of the combination with Tatts Group in December 2017, TAH is recognized as a world-class gambling entertainment group. The company operates under a series of long-dated government-issued licences and authorisations. As a revenue break-up in CY18, Lotteries & Keno represents 49%, the largest chuck of total Group revenue. Wagering & Media and Gaming Services accounts for 45% and 6%, respectively.


Key Financial Metrics - CY18 (Source: company reports)

Financial Performance in 1H FY19:Net profit after income tax for the company stood at $182.5 million, up from $24.6 million in 1H FY18. The significant growth was largely on the back of full period contribution from the Tatts Group. Basic earnings per share (EPS) for 1H FY19 at 9.1 cents per share was substantially higher than 2.6 cents per share in 1H FY18 which was negatively affected by the discontinued Sun Bets operations. Revenues witnessed a growth of over 100% to $2,787.4 million on the pcp. The management updated that the integration program is on progress which is leading to an upgradation of synergy targets. EBITDA for TAH came in at $24 million from synergies and business improvements seen in 1H FY19. The management expects to deliver $55 million in FY19, up from the previous target of $50 million. Performance from ‘Lotteries & Keno’ in 1H FY19 was outstanding with revenue growth at 18.1%, driven by digital growth and game innovation. Revenues from ‘Wagering & Media’ and ‘Gaming Services’ were down 3.8% and 4%, respectively.

What to Expect:TAH is expanding its reach with the delivery of EBITDA synergies and business improvements from the combination of Tatts. TAH targets to deliver $55 million of EBITDA from synergies and business improvements in FY19 from the previous projection of $50 million. The company has set FY21 target in the range of $130 million-$145 million of synergies and business improvements.

Stock Recommendation: Continued business performance through investment in customer experience, product and digital innovation are likely to enable the company to achieve the set targets. The stock is currently trading at price to earnings multiple of 54.760x. Considering the above-mentioned parameters, we give a “Buy” recommendation on the stock at the current market price of $4.630 per share (up 0.652% on 09 May 2019).
 

QBE Insurance Group Limited

Improved Attritional claims supported the Financial Performance in FY18: QBE Insurance Group Limited (ASX: QBE) is engaged in the business of underwriting general insurance and reinsurance risks, management of Lloyd’s syndicates and investment management. The group recently released an update on share buy-back and communicated that total number of share bought back as on 07 May 2019 stood at 4,067,225 for the total consideration of ~$50,500,784.4

Financial Performance in FY18: QBE reported a cash profit after tax of $715 million in FY18, improving significantly from the cash loss of $262 million in FY17. NPAT stood at $390 million as compared to a loss of $1,249 million in FY17.


Reconciliation of cash profit after tax (Source: Company Reports)

The improvement in Group performance was owed to significantly improved attritional claims witnessed by all the divisions along with a reduction in catastrophe claims.However, this benefit was partially offset by a lower net investment yield. The Group reported a combined operating ratio of 95.7% in FY18, improved from 103.9% in FY17 and was in-line with the target of 95.0%-97.0%.  Improved Attritional claims ratio to 50.2% in FY18 from 53.1% in FY17, supported the uplift in underwriting profitability.


Clear Improvement in Earnings Quality (Source: Company Reports)

What to Expect: The management expects FY19 to witness Combined Operating Ratio in the range of 94.5%-96.5% with net investment Return to be at 3.0%-3.5%. The three-year average cash ROE target range is 8% to 12%.

Stock Recommendation: At the current market price of $12.840 per share, the stock is trading at price to earnings multiple of 31.130x. The stock is trading near to its 52-week high price of $13.16. Commenting on historical performance, the stock has gained a 29.64% return on YTD basis. On the valuation front, the stock is trading at a price-to-book value of 1.4x which is slightly above the industry average of 1.2x. Hence, considering the valuation and decent fundamentals, we give a “Hold” recommendation on the stock at the current market price of $12.840 per share (up 0.548% on 09 May 2019).


 
Comparative Price Chart (Source: Thomson Reuters)   
 

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