The contrast between Virgin Australia’s result and Qantas’ is pretty stark. Qantas recorded a heavy loss while Virgin came in with reported underlying profit before tax of $82 million and
statutory net profit after tax of $23 million. But is it a good enough result to justify investing in airline? The brokers are pretty unenthused, seeing the stock as fairly priced.
Deutsche has a neutral recommendation reckons the initial strategy “appears to have worked” with strong yield increases achieved as well as capacity growth. But the problem of any advantage gained in a duopoly is that it tends to normalise.
” The “Game On” strategy announced today is targeting
improved profitability through product, service and productivity improvements
over the next three years. Given the first stage has been delivered ahead of
time we continue to view favourably management’s execution capability.
The competitive environment is the big unknown in the short term
The domestic aviation market appears to be adding c10% capacity in the next
6 months and we believe yields will come under pressure. VAH’s strategic
changes position it as well as it can be. VAH has been disciplined with its
growth and we would expect it to continue to act rationally. However with
tough economic conditions we would expect some yield pressure in 1H13.
Macquarie says the company is targetting $200 million in efficiency gains, but the pressures will be there in the future:
VAH Management has successfully stabilised the business over the past two
years, with returns on equity finally starting to move back towards the
company’s cost of capital. However given the near term competitive
headwinds, we see little scope for further appreciation in the share price
beyond book value of $0.46, hence we maintain our Neutral recommendation.
The forward earnings multiple is below 10 times, but there is no forecast dividend until 2013-2014. UBS is neutral and not expecting a dividend in the forecast period:
Cashflow was a touch weaker than expected in the 2H, with a $50m reduction in
cash due to high loan amortisation. This saw unrestricted cash close the year at
$480m, down slightly from Dec-11, which represents only 11% of FY13e revenue.
This needs to, and we believe will, be built up gradually with a c.$100m
improvement expected in FY13.
The question that remains is why invest in an airline? Especially with little prospect of dividends.