as a spec, page-6

comments from SSB in todays research:

Earnings Downgrade

Baptism of Fire

† Probably the smartest thing VBA did in its November 2003 prospectus was to exclude any profit guidance for FY05, for if it had, the IPO would have struggled to get away at $2.25 per share in our view.
† The profit warning at the AGM is a significant blow to the credibility of both VBA's and Patrick's management, given both the respective CEOs have continuously denied Jetstar "would have an impact on VBA".

† We believe that their claim that the 22% Profit Before Tax (not EBIT) fall in the 4 months to 31 July 2004 (on 29% revenue growth) is the result of VBA's own capacity expansion and not due to Jetstar/Qantas seems to lack credibility.

† The two key variables impacting our NPAT forecasts now are: (1) the extent to which passenger revenue yields decline as a result of Jetstar's entry and (2) whether or not VBA increases its fuel surcharges. We do expect Qantas to increase fuel surcharges and VBA to follow.

† We have cut our NPAT forecasts by 11.5% ($22.7m) in FY05E, 15.7% (37.4m) in FY06E and 19.0% ($51.4m) in FY07E after reducing our yield assumptions by even more, cutting loads and increasing jet fuel costs.

† As a consequence, our target price has fallen 20% from $2.23 to $1.76 per share. Interestingly, valuing VBA at Qantas's FY05E PE (7.5x using our top of the market estimate) implies only $1.26 per share. We now believe VBA only starts to become attractive below $1.45 per share.

† VBA still needs to lift its PBT by 25% for the remainder of FY05 to meet our new forecasts. Implications for Qantas are negligible in our view