November 16, 2012, 11:14 AM Analysts Cool On Qantas After Buyback, Guidance By Ross Kelly
Qantas investors take heed.
Bloomberg An Emirates Airline flight attendant stands in front of a Qantas QAN.AU -1.02%Airways Ltd. aircraft during a media event in Sydney, Australia, on Thursday, Sept. 6, 2012. Experts on the stock haven’t reacted as enthusiastically as the market did to its share buyback and profit guidance announced Thursday. In fact, most of them have cut their 12-month price target on the airline, even though its shares closed 4% higher by the final bell.
Investors interpreted the news as a sign the group’s wayward international unit is back on the straight and narrow. But pundits at investment banks including Goldman Sachs GS +1.05%, Macquarie and UBS UBSN.VX +0.07%aren’t convinced.
To note, these people have got it wrong on Qantas before. Earlier this year analysts were caught out with “buy” recommendations and lofty price targets on Qantas immediately before the airline announced a shock profit downgrade in June that sent its shares tumbling.
Could it all just be a case of once bitten, twice shy?
Looking at analysts’ client notes Friday, it’s easy to identify some solid reasons for their trepidation.
First it’s said that although Qantas’s underlying pre-tax profit guidance for the year to June 30 of A$180 million-A$230 million leaves room for an improvement on last year’s A$202 million, it includes a one-off A$135 million settlement payment from Boeing BA -0.35%.
More important though is their take on Australia’s domestic travel market.
“We believe the market is overlooking the extent to which Qantas’s domestic market, which has long been considered the cash cow of the group, has taken a material hit to earnings,” says Russell Shaw, an analyst at Macquarie.
Qantas’s financial performance has long been buttressed by its dominance of the Australian domestic travel market, long supported by a resources-led economy that has stimulated business travel, particularly between financial hubs such as Sydney and Melbourne and the mining capital of Perth.
The so-called Flying Kangaroo’s ascendency is now being challenged by Virgin Australia VAH.AU -0.61%, which has started expanding capacity and putting business-class seats on its planes. The ensuing turf war has seen prices on business-class tickets fall to some their lowest levels in decades, putting pressure on airlines’ revenue.
UBS analyst Simon Mitchell says Qantas’s profit guidance implies a 6% degradation in domestic unit revenue.
“We expect these pressures to dissipate in the second half, but the typical bias towards the first half means that the airline will only be marginally profitable in the the second half in our view,” Mr. Mitchell says.
UBS has nevertheless kept a “buy” recommendation on Qantas on valuation grounds, while lowering its price target to A$1.60 from A$1.67. The shares closed Thursday at A$1.28.
Macquarie kept a “neutral” recommendation and A$1.44 price target, while Goldman Sachs kept a “neutral” call and lowered its price target to A$1.41 from A$1.44.
Credit Suisse CSGN.VX -0.52%, while lowering its target to A$1.76 from A$1.95, remains the most bullish broker on the stock.
“Despite the weakness in domestic, we still believe the upside in the stock remains the structural turnaround of the international business,” analyst Nicholas Markiewicz says.
Key catalysts that could drive the shares higher include regulatory approval of Qantas’s proposed alliance with Emirates Airline, capacity rationalization in the domestic market, and continued evidence the groups international turnaround strategy is working.
(20min delay)