Bell Potter:irgin Blue Airlines Ltd – 1H09 result shows solid...

Bell Potter:

irgin Blue Airlines Ltd – 1H09 result shows solid cost control

Virgin Blue Airlines Ltd (VBA.AX - A$0.24) Buy Target A$1.10

Although Virgin’s underlying net profit of A$41m was below our A$53m forecast, controllable (ie. ex-fuel) unit costs were better than expected with a 1% decline on the prior period showing management’s cost mitigation measures are starting to take effect. High operating leverage sees minor changes to our capacity assumptions cause a 26-38% downgrade to our FY09 and FY10 EPS forecasts. Current profitability is being impeded by temporary issues such as out of the money fuel hedging (collars at US$80-90bbl, versus spot of US$50bbl), sub-scale Embraer operation, and a supply-demand imbalance in the Australian domestic market. As such, we expect Virgin’s narrow body business to recover rapidly over the next 3 years. V Australia is not expected to turn a profit until FY11. Virgin’s unrestricted cash balance deteriorated slightly during the 1H from A$402m to A$226m, but we expect this to recover by June as some of A$490m in deposits with Boeing and Embraer are released on already-committed sale and leaseback transactions. Management have also highlighted A$150m of unencumbered assets. We expect unrestricted cash balance to operating expenses to slightly deteriorate from 59 days as at June-08 to 46 days as at June-09. Our fleet replacement value drops slightly due to earnings changes. We note book value per share has dropped from 88c to 58c as at Dec-08 due to hedging losses.



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