Thought I might offer my two cents on this. Qantas has been stung by the ASX in the past two weeks. Honestly don’t know how the ASX 200 is a good gauge of the Australian market when the Big Four banks alone make up 30% of the index. Notice how the All Ords has outperformed the ASX200 in May. IMHO there has been a sell off by some institutional funds who bought in late, looking to offset the losses elsewhere in their portfolios (i.e. in the banks). Franklin Resources are prepared to dispose of their stocks at market prices until their stake has been completely whittled down (at last glance their holdings are sitting at 7.6%, down from 14% at the start of the yr). This should have come down to 3-4% when preliminary results are out on 20 Aug.
So technicals may not have been good these 2 wks but take a look at the fundamentals. They’re rock solid. Here are ten reasons why the share price has plenty of support, will recover fast and continue to rise further in the coming weeks.
1: Qantas has largely resolved all its industrial disputes and dealt with the threat of industrial action hanging over its head like the sword of Damocles since AJ took over. The last holdouts (the pilots) seem to have come around as well, with the AIPA likely to approve an agreement with the option to purchase new Boeing 787-9 Dreamliners to secure their future employment.
2: The cost cutting and transformation process has been largely successful. Joyce has had to step on a few toes, but by and large he’s getting the job done here and is paying down the company’s debt.
3: Qantas and Virgin have ended their capacity war, ticket prices are increasing, especially in business class and Qantas is getting better at maximising its RSF. Anyone who’s worked for Qantas will know they have one of the best revenue management systems in the world in place and they are now free to use it with brutal effect, without having to worry about having this race to the bottom anymore.
4: Cabinet looks set to dump this bizarre cabotage proposal. There is a good reason why no other country allows this, and honestly what were they thinking? Stimulating tourism.. if the gov’t’s plan is to deregulate any industry it can get its hands on and trash all our national champions and then this would have been a spectacular own goal.
5: The ACCC will probably drop its objection to the Qantas-China Eastern alliance. I don’t see how an agreement agreed as part of Oz-Chinese FTA negotiations, in the presence of Xi Jinping and Abbott will be derailed by the ACCC. Even Air China and the Chinese ambassador have voiced concerns that this is not in (Australia’s) national interest.. i often find them more of an impediment to shareholders myself. IMO, they will probably approve the tie-up and impose certain capacity conditions – there is precedent for this –like when the ACCC okayed the alliance between Virgin and ANZ in 2013.
6: Oil prices are coming down. OPEC meets on Friday and led by Saudi Arabia, will likely keep output unchanged to defend market share. The Americans are pressing for a deal with Iran, which will bring even more supply back onto the market and even Iraq is pumping at record levels. Many American traders have focused on the declining rig count but have not realised that US production has in fact been increasing as well. WTI is trading on sentiment more than anything. The frackers are getting more efficient and there is plenty of supply waiting to come back online if oil hits $65 which will put a ceiling on prices if anything. Supply and demand are deeply out of kilter and once the realists take charge this dead cat bounce in brent will start to reverse and we will be in for a period of low oil prices which will only add fuel to the share price.
7: The Aussie dollar sits at near 5-year lows against the greenback. It may fall further, but we should expect it to trade in this 0.75-0.80 band for the foreseeable future as the RBA awaits any move from the Fed later in the year.
8: There’s the prospect of the resumption of dividend payments to shareholders. This should be welcome news to retail investors and employees.
9: Qantas is squeezing every dollar out of its customers. Even its ancillary businesses like Hooroo are raising their commission rates.
10: Qantas is still selling at a huge discount compared to its regional rivals which have not had anywhere near the good year that it has had (flag carriers of comparable size, revenue, turnover). Compare: Qantas (Market Cap = AUD$7.5b)
Singapore Airlines (Market Cap: SGD$13.6b = AUD$13.0b)
Cathay Pacific (MC: HKD$77.2b = AUD$12.8b)
Japan Airlines (MC: JPY 1.52t = AUD$15.7b)
Air China (MC: HKD$166.86b = AUD$27.7b)
China Eastern (MC: HKD$123.4b = AUD$20.5b)
Most of the blue chips that soared during the large rally we had in Feb have since shed their gains, while Qantas has held on firmly. In fact, the share price has risen in the long lead-up to every major announcement from the company since Joyce begun his ‘transformation’ program. We should be in for a major surprise in August.
My advice? Buy up now while it’s still cheap, hang in there and wait for the rebound.
Bring on $4? Just watch. It will come a lot sooner than you think.
(20min delay)