VIRGIN BLUE HOLDINGS LTDNot surprisingly, we have had numerous...

VIRGIN BLUE HOLDINGS LTD

Not surprisingly, we have had numerous queries from subscribers about the upcoming Virgin Blue float. This has obviously been a big year for floats, with many large companies going to the public to raise capital. Virgin Blue is different from most of the other floats, in that the public will have ample opportunity to get their hands on a lot of stock. What is also important to know is that only a quarter of the company is being offered to the public, with Patrick Corporation Ltd (PRK) and Virgin Group retaining the remainder.

Between 281 and 312 million shares are being offered at an indicative price range of between $1.80 to $2.25, but the final price may be set above the high end if the demand is there. Looking at some of the recent floats (such as ALH), it is our belief that the final price will be at the higher price.

At that high end of the scale, Virgin Blue will have a market capitalisation of $2.3bn, compared to Qantas Ltd’s (QAN) $6.3bn capitalisation. At that number, Virgin Blue will list at a forward P/E multiple of 15.4 times 2004 forecasted NPAT (net profit after tax), whereas QAN trades on a relatively cheap 11.4 times 2004 earnings. Of course, Virgin Blue has tried to justify this by saying the growth expectations of the company should justify the price multiple. They are anticipating NPAT growth of 38% between the 2003 financial year and 2004 financial year.

Were this level of growth to be sustainable, then we feel that the high PE multiple would be justified. But considering Virgin Blue has already grabbed a 30% market share, we think maintaining the current level of growth would have to be unlikely in the future. Furthermore, QAN will be starting up its own budget airline to match Virgin Blue, which should limit Virgin Blue’s market share growth.

For the reasons we have mentioned, we do not believe the Virgin Blue float represents particularly good value. Indeed, we feel that QAN represents a far better exposure to the airline sector. As a medium to long-term investment, we therefore do not think it is worth taking up. However, that is not to suggest that there will not be a stag profit for shareholders to take once the company lists. The market is quite bullish on floats at the moment, so there is every chance that the excitement and irrationality that has plagued the market of late will spill into this stock. Despite that, this is still a stock that we will not recommend.

For those who wish to buy Virgin without our endorsement (as we are certainly not saying there is no chance of a good result on this one), prospectuses can be downloaded at