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Sunday, June 5, 2011

Qantas Can Stay Cheap For Much Longer

Yesterday Qantas released traffic statistics for April, the feature being a strong increase in domestic yields that combined with a flat load factor for the domestic operations in total.
The data also showed some improvement in international yields and traffic, which Credit Suisse suggests offers support for an expected improvement in revenues in FY12. Hedging has also increased, Qantas now being 50% hedged for FY12 at US$113.30 per barrel, up from 44% hedged at US$111.20 per barrel in March.Post the update on traffic stats there have been some different reactions with respect to earnings estimates for Qantas. Credit Suisse has left estimates unchanged through FY12, while Macquarie has trimmed forecasts by 5-9% over the same period.
Morgan Stanley has reacted more severely, cutting underlying profit before tax forecasts for FY11 by 2% and for FY12 by 26%. The changes reflect higher Australian dollar and oil price expectations, demand destruction from higher fuel surcharges and ongoing union negotiations.
Consensus earnings per share (EPS) forecasts for Qantas according to the FNArena database stand at 19.3c for FY11 and 27.3c for FY12.The union negotiations identified as an issue by Morgan Stanley may lead to strike action, something the broker suggests could result in some brand damage and so deter some passengers from using the airline.
In the view of Credit Suisse, the potential for a prolonged strike is already factored into the Qantas share price at current levels. This implies something of a mis-valuation as Credit Suisse doesn't see a prolonged strike as likely.
Adding to the value on offer, Credit Suisse points out underlying business conditions are improving. This trend should continue as the market recovers from the natural disasters of March and given a reduced competitive threat from Tiger Airways.
This implies significant value in Qantas at current levels, as Credit Suisse estimates the stock at current levels is trading on an earnings multiple of 6.6 times for FY12. RBS Australia estimates a FY12 multiple of 7.5 times but agrees the stock is offering value, particularly as confidence increases on the back of improving monthly reports such as Qantas delivered in April.
Both Credit Suisse and RBS Australia rate Qantas as a Buy, while Morgan Stanley has an Overweight rating within an In-Line view on the Australian Airlines sector.
Macquarie is not as positive, downgrading Qantas to Neutral from Outperform. This reflects the view Qantas lacks positive earnings momentum at present that would reverse the recent decline in the share price.
This suggests little scope for share price outperformance near-term, especially given some downside risk to consensus forecasts and the potential uncertainty of labour action.
Overall the FNArena database shows Qantas is rated as Buy seven times and Hold once. The consensus price target according to the database is $2.90. Targets range from $2.30 to $3.40.
Shares in Qantas today are down slightly and as at 11.30am the stock was 5c lower at $2.04. Over the past year Qantas has traded in a range of $2.03 to $2.97. The current share price implies upside of better than 40% to the consensus price target in the FNArena database.
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