Investing in airlines is only for the brave, or foolish. But analysts seem quite happy to sit on the fence. Goldman has a neutral rating,
and a modest price target of $1.30:
Qantas (QAN) expects to report a FY12 underlying profit before tax (PBT) of A$50- A$100mn (vs. GSs was A$249m and consensus A$295m). Group yield (excluding foreign exchange) for 2HFY12 is expected to increase by 0.5-1.0% which is down on its previous estimate of 1.5%-2.5% (provided in early May). Qantas International expects to report a loss at the EBIT line of >A$450mn in FY12 (including A$100mn impact of industrial action) vs a loss of A$216mn in FY11. In the domestic market, the company expects Qantas and Jetstar to deliver improved results on pcp with a combined EBIT of >A$600mn.
Macquarie also has a neutral rating and an even more modest price target of $1.21. Macquarie thinks the biggest risk is a capital
raising:
Management reiterated that the balance sheet is structurally sound with over $3.3bn of cash against ~$6.72bn in onbalance sheet debt, and further highlighting that operating cash flows have held up relatively well in the current environment. The weakness in the yields, specifically international inbound, shows a clear difficulty stemming from a soft European, and to some extent, US economy. Were this to worsen, the international business would be put under further pressure and the risk of a credit downgrade would rise, in our view. S&P as well as Moody’s have come out and stated that they remain comfortable with QAN’s liquidity profile and capital position at this point.
Deutsche has a buy and a bullish price taregt of $1.50. Despite noting that S&P might follow Moody’s in issuinig a downgrade:
Our forecasts of QAN’s credit metrics show that QAN’s S&P rating could be downgraded from BBB (to be consistent with Moody’s downgrade in Jan) but we note the company would continue to hold an investment grade rating and has a strong funding position with a cash balance of more than $3bn. Price Target reduced to $1.50/share (prev $2.00/share); Key risks We value QAN via weighted avg of DCF (WACC 10.4%) & PE (10.5x). Key risks: execution of International Transformation, success of $1.5bn QFuture program, fuel price, rates and FX changes, market share loss, Jetstar growth execution, market capacity growth, workforce relations, global shocks & brand damage (more detail on valuation & risks, page 6).
Our forecasts of QAN’s credit metrics show that QAN’s S&P rating could be downgraded from BBB (to be consistent with Moody’s downgrade in Jan) but we note the company would continue to hold an investment grade rating and has a strong funding position with a cash balance of more than $3bn. Price Target reduced to $1.50/share (prev $2.00/share); Key risks We value QAN via weighted avg of DCF (WACC 10.4%) & PE (10.5x). Key risks: execution of International Transformation, success of $1.5bn QFuture program, fuel price, rates and FX changes, market share loss, Jetstar growth execution, market capacity growth, workforce relations, global shocks & brand damage (more detail on valuation & risks, page 6).
Deutsche has eps growth extremely volatile at minus 87.5% this financial year an up 432% next. No dividend is in sight. On any measure it will be a bumpy ride.
