Qantas Airways Limited

Enhanced Market Share Despite Tepid Macros:Qantas Airways Limited (ASX: QAN) is a provider of air transportation services across domestic and international segments.

Q1FY20 Operating Performance for the period ending 30 September 2019:QAN declared its first quarter results wherein, the company reported revenue at $4.56 billion, up 1.8% on y-o-y basis, majorly driven by a strong performance from Qantas International. The business witnessed headwinds from foreign exchange expenses, primarily impacted by Hong Kong unrest and trade war impact on global freight market. QAN reported 2.1% growth in Group Unit Revenue on pcp. In the domestic segment, the company reported a decline of 0.9% in unit revenue from the prior corresponding quarter. QAN posted 0.2% decline in total group capacity, on account of 0.6% decline in international segment and 0.5% higher capacity across its domestic segment. During the quarter, the group reported a growth of 1.7% in total passenger carried at 14.34 million. Revenue seat factor during the quarter increased to 84.8% from 83.7% in the prior corresponding quarter.


Q1FY20 Operating Highlights (Source: Company Reports)

During the quarter, the overall demand for corporate travel was flat. Moreover, small business travel also witnessed a slowdown. On the contrary, market share of the company continued to increase in both the segments. Demand across the price sensitive leisure market was soft throughout the quarter leading to 2.6% fall in Jetstar’s unit revenue. On the other hand, Jetstar benefited from higher load factors that supported ancillary revenue growth.Jetstar International revenue also grew in the quarter, led by strong demand on leisure routes to Asia, that offset weakness in markets impacted by the strength of the US Dollar.

Outlook:For the remainder ofFY20, full-year fuel cost is expected around $3.98 billion, with a maximum possible increase to $4.05 billion. The management further expects that recent currency movements will increase non-fuel costs by a further $25 million during the first half.

Stock Recommendation: The stock of QAN is quoting at $6.280 with a market capitalization of ~$10.24 billion. The stock is trading at the upper band of its 52-week trading range of $5.180 - $6.770. The stock has generated decent returns of 15.40% and 16.22% during the last three months and six-months, respectively. Enterprise value to sales multiples of the stock stands at 0.7x on TTM basis as compared to the industry median of 1.6x. QAN remains on track to deliver at least $400 million in transformation benefits during FY20, with an increased focus on cost reduction initiatives during the second half, while QAN has fully hedged its fuel for FY20 and expects a benefit from significant price falls. Considering the aforesaid facts, current price movements, and business prospects, we recommend a ‘Hold’ rating on the stock at the current market price of $6.280, down 3.681% on account of the release of trading update for 1QFY20.

Auckland International Airport Limited
 

Decent Growth Across All Segments: Auckland International Airport Limited (ASX: AIA) develops airport infrastructure across New Zealand. On 23 October 2019, AIA announced that it has re-elected Christine Spring as a director. Elizabeth Savage was also elected to the board as a new independent director. The company further notified that total quantum of Directors’ fees was increased by $26,630 from $1,566,720 to $1,593,350.

Recently, Auckland Airport confirmed the issuance of 3,620,888 new ordinary shares under its Dividend reinvestment plan at a price consideration of NZD 8.8387 per share.

FY19 Operating Performance for the period ending 30 June 2019: QAN declared it FY19 full-year report wherein the company reported revenue of NZ$743.4 million, up 8.7% on previous year and underlying profit after tax at NZ$274.7, up 4.4% on pcp. Passenger movements stood at 21.1 million, up 2.8%. The period was marked by a 2.6% uplift in aircraft movements at 178,771.

The company reported a y-o-y growth of 3.8% in its Aeronautical segment at NZ$312.7 million during the year. Queenstown reported strong passenger growth with a revenue of NZ$49.6 million, up 8.5% on pcp. Income from the retail segment witnessed an increase of 18.5% y-o-y at NZ$225.8 million. Transport business revenue stood at NZ$64.2 million, up 5.2% on y-o-y basis. Income from property and hotels registered a growth of 9.5% and 0.5%, respectively.


FY19 Operating Highlights (Source: Company Reports)

Outlook:  As per the Guidance, the company is expecting FY20 underlying net profit after tax within the range of NZ$265 million to NZ$275 million. FY20 capex is expected within NZ$450 million to NZ$550 million.

Stock Recommendation: The stock of AIA is quoting at $8.370 with a market capitalization of ~$10.27 billion. The stock is trading at the upper band of its 52-week trading range of $6.200 to $9.450. The stock has generated returns of -8.55% and 13.12% during the last three-months and six-months, respectively. The stock is trading at a price to earnings multiple of 20.37x on TTM basis as compared to the industry median of 11.4x.On price to cash flow multiple, the stock is available at 29.3x on TTM basis as compared to the industry median of 6.3x. Hence, considering the aforesaid facts, we have a wait and watch stance on the stock at the current market price of $8.37, down 0.947% on 24 October 2019.

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