Stocks’ Details 

Qantas Airways Limited

Business Update: Qantas Airways Limited (ASX: QAN) operates international and domestic air transportation services. The market capitalisation of the company as on 27 November 2020, stood at ~$10.42 billion. Owing to COVID-19 disruption, the company was focused on preserving cash and strengthening liquidity. Operations were suspended and the group raised over $2 billion in debt in March 2020. An additional $1.4 billion was raised during the period. QAN had liquidity of $4.5 billion as of FY20. Revenue fell from $17,966 million in FY19 to $14,257 million in FY20. Despite a 21% drop in revenue, the company posted an underlying profit before tax of $124 million. Despite the challenging year, the group posted a positive operating margin of 2.8% in FY20. Revenue available per seat kilometre (RASK) increased to 8.99 (c/ASK) in FY20 from 8.85(c/ASK) in FY19.

 Key operating metrics (Source: Company Reports)

Outlook: Australia has done a better job in managing the COVID-19 virus in comparison to other countries. As the economy reopens, capacity and revenue are expected to pick up for QAN. However, the sector might take some time to recover to pre-COVID levels. QAN has announced a three-year recovery plan and plans to carve out $15 billion in costs and deliver $1 billion a year in annual savings from FY23. QAN expects domestic capacity to rise to 50% by Christmas, if the opening of Queensland airport to New South Wales materialises.  Latent travel demand has seen some sort of recovery, and the company expects that its domestic market share will increase organically from around 60% to 70%, over a period of time.

Stock Recommendation: The impact of COVID-19 has disrupted the sector and the operations of the company. QAN has built a comfortable cash position and is favoured to post improved financial performance as the demand improves for domestic and international travel. As per ASX, the stock of QAN gave a positive return of 44.3% in the past three months and a return of 22.9% in the past one month. As per ASX, the stock of QAN is trading above the average of its 52 weeks’ trading range of $2.03-$7.46. On a technical front, the stock of QAN has a support level of $4.5 and a resistance level of $6.2.   On a TTM basis, the stock is trading at an EV/Sales multiple of 1.4x, lower than the industry median (Industrials) of 2.1x. Considering the current trading levels, comfortable liquidity position, and positive operating margin, we recommend a ‘Hold’ rating on the stock at the current market price of $5.520, down 0.181%  as on November 27, 2020.

Flight Centre Travel Group Limited

Company Update: Flight Centre Travel Group Limited (ASX: FLT) is into the business of travel retailing –leisure and corporate travel sectors, in-destination travel experience businesses which include tour operations, hotel management, destination management companies (DMCs) and wholesaling. The market capitalisation of the company stood ~$3.56 billion as on November 27, 2020.

Financial Update: Global leisure and global corporate businesses were both profitable in February 2020. The COVID-19 disruption has impacted the operations of the company and total transaction value (TTV) for FY20, which decreased to $15.3 billion from $23.7 billion in FY19. The global leisure business delivered a profit of $20 million during the eight months to February 29, 2020 but made significant losses from March onwards. ROE was negative at 47.5% during FY20. There was a ~$510 million underlying loss before tax during FY20 as compared to a profit before tax of $343.1 million in FY19. During the same period, there was a 26% revenue growth in the airline charter business.  It raised capital of around $900 million ($700 million equity + $200 million debt facility increase), recognising the need to raise liquidity. FLT had a comfortable liquidity position of $1,029 million as of 30 September 2020.

Outlook: As travel restrictions are lifted and operations resume, FLT will look to increase its revenue and focus on targeted cost, particularly in its leisure business. Domestic and regional travel are key drivers for the company and constituted 25%-30% of pre-COVID-19 leisure business globally. The company expects the corporate business to profit ahead of the leisure business, given the heavy domestic weighting, coupled with a lower cost base and a strong pipeline of account wins.

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months 

Stock Recommendation: Despite the challenging business conditions, FLT managed to post 26% revenue growth in the airline charter business in FY20. Though the TTV has decreased during FY20, it was able to retain its income margin at a comparable level with FY19. As per ASX, the stock of FLT gave a return of 42.4% in the past three months and a return of 43.01% in the past one month. As per ASX, the stock of FLT is trading close to its 52- weeks’ low levels of $8.56, proffering a decent opportunity for investors. On a technical front, the stock of FLT has a support level of $16.5 and a resistance level of $18.2. We have valued the stock using an EV to sales multiple based illustrative relative valuation and have arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers such as Corporate Travel Management Ltd (ASX: CTD), Helloworld Travel Ltd (ASX: HLO), Qantas Airways Ltd (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VAH). Considering the current trading levels, comfortable liquidity position and a strong pipeline of account wins, we recommend a ‘Buy’ rating on the stock at the current market price of   $17.4, down 2.902% as on November 27, 2020.

Webjet Limited

Capital raised: Webjet Limited (ASX: WEB) is into the business of online sale of travel products, including flights and hotel rooms. The business is divided into two units – B2C division (Webjet OTA and Online Republic) and a B2B division (WebBeds). The market capitalisation of the company stood at ~$1.99 billion as of November 27, 2020. The Group raised $346 million in equity capital at an offer price of $1.7 per share in April 2020, followed by another issue of $163 million Notes in July 2020.

Financial Update: The company had announced positive first half EBITA results in FY20 and was upbeat about its full-year prospects, but with the onslaught of COVID-19 pandemic, the financials took a beating. FY20 revenue was down by 27% to $266.1 million and EBITDA was down by 80% to $26.4 million, compared to the prior year. The total transaction value (TTV) was down by 21% to $3,020.8 million in FY20, compared to $38,31.2 million in FY19. The liquidation of Thomas Cook, a key client of WEB, impacted the revenue stream.

FY20 Financial Results (Source: Company Reports)

Outlook: The company believes that travel is fundamental to an interconnected global society and therefore, its financials are bound to improve as the economy recovers. Historically leisure travel has recovered faster post-recession than business travel. WEB has strong exposure to global and domestic leisure markets. Consumer confidence continues to remain strong in its key flights and hotel markets. Given its global footprint, brand strength and high customer base, the company is set to capture demand whenever it is available.

Stock Recommendation: The company has raised capital to fight the COVID-19 pandemic. The proceeds strengthened the company’s balance sheet and supported the unwind of negative working capital and reduction of B2B debt exposure. It was able to negotiate with bankers to extend the maturity of the remaining term debt to November 2022. Moreover, its strong balance sheet and capital position provide an opportunity to gain market share in the long run. As per ASX, the stock of WEB has given a return of 65.6% in the past three months and a return of 50% in the past one month. As per ASX, the stock of WEB is trading close to its 52-week low of $2.25, proffering a decent opportunity for investors. On the technical front, the stock of WEB has a support level of $4.8 and a resistance of $6.2. On a TTM basis, the stock is trading at an EV/Sales multiple of 9.8x, lower than the industry average of 11.5x. Considering the current trading levels, decent balance sheet and decent capital position, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $5.69, down 3.232%  as of November 27, 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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