Qantas

Here is an update on the different sectors of Australian market from market analyst Macquarie Research Equities.

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Qantas has an Outperform recommendation and a 12 month share price target of $5.45 from Australian stock analyst Macquarie Research Equities.

QAN: “QANTAS” Vs “V Australia”

Qantas (QAN) has a share price target of $6.70 per share from Australian sharemarket analyst UBS. Qantas July unit revenue up 12%, 14% rise in July revenue on only 2% growth in capacity: Qantas' July traffic numbers reveal an estimated 14% rise in passenger revenue (constant currency) on just 2% growth in capacity. The resulting 12% rise in unit revenue (RASK) was made up of a 3%pt expansion in loads and 9% growth in yield. This sets a new monthly record for unit revenue expansion in the current cycle. FY07 averaged 10% growth. Domestic saw a big jump, International continues to moderate: Domestic was the positive surprise with 13% growth in RASK, well ahead of the 5% average trend we saw in 2H07. This partly reflects a weak comparable July-September period in the domestic business in FY07. The domestic mainline operation is now running with 12-month trailing loads of 80%. International continues its trend of moderation, growing unit revenue by 10%, which is down from the highs of 13% seen at the beginning of 2007. FY08 forecasts rely on 5% unit revenue growth for the full year: The analysts are currently forecasting 5% growth in unit revenue in FY08, which results in our 37% growth in FY08 pre-tax profit compared to management's guidance of "around 30%" growth. They expect very strong 1H revenue performance from Qantas, but our full year forecasts reflects a return to capacity growth (by Qantas and the industry) towards the end of 2007, which will make 2H growth difficult. Their $5.90 valuation of the Australian airline is based on 11x FY08E EPS and our A$6.70 price target reflects half their assessed benefit from Qantas' strategic restructuring plans.

Qantas Airways (QAN) have a Buy 2 broker call and a share price target of $6.50 from Australian Stock Exchange analyst UBS. Digging into Capacity Growth and Updating Price Target: their prior A$5.90 price target was based solely on our 12x FY08E EPS valuation, and did not include anything for our A$1.10 in extra value from frequent flyer demerger and A$2bn in capital management as published on 22 May. They no longer see management reluctance as an impediment and are raising our target to A$6.50 to reflect half of the benefit. Clear catalysts to come: Apart from ongoing traffic momentum, we expect an announcement as to capital management at the August result, and more detail on the frequent flyer demerger towards the end of this year. Tiger's entry remains the only visible negative event this year. International capacity growth needs to be watched: They were surprised at management's expectation for its international capacity to grow by 3% in FY08, 10% in FY09, and 13% in FY10; reflecting the deferral of aircraft retirements. They expect similar growth from Qantas' rivals highlighting the finite nature of the current supply demand balance and our flat pricing outlook from FY09 onwards. The analysts' A$5.90 valuation is based on 12x our FY08 EPS forecast, which is in the middle of the current trading range of Qantas Airways' peers. Their A$6.50 price target incorporates an additional 60c for the frequent flyer demerger and capital management.

Qantas has a Buy 2 broker call and a $5.90 share price target from sharemarket analyst UBS. Loyalty Demerger, and Capital Management: At least another 12 months of tight supply and strong demand: They are raising their FY08 forecasts by 11% and reinstating a rating with Buy 2 following the breakdown of APA's bid. Qantas achieved a record 15% growth in international unit revenue in the March quarter driven by no growth in market capacity and strong demand. The analysts expect these conditions to continue for at least another 12 months, which should drive earnings momentum. Management could demerge the Frequent Flyer program: They believe APA's bid is likely to encourage the Qantas Board to become more proactive on shareholder value initiatives. Amongst various options, one such strategy which the analysts believe APA was intending to pursue was demegring the Qantas Frequent Flyer Program in a similar fashion to Air Canada's Aeroplan. They estimate this could add 70c per share in value. A$2bn of capital management still retains BBB+: They also expect a review of the airline's capital management policy and believe Qantas could sustain a A$2bn buyback without jeopardising its BBB+ rating. At 12x, they estimate such a buyback would be 9% EPS accretive and add a further 40c of value. In their view, unwillingness to act by management and the Board may be the biggest barrier to this upside. Management and Board appear proactive: Qantas' briefing to the market post the APA deal collapsing confirms its intention to execute on some of the strategies contemplated by the consortium, including demerging the Frequent Flyer Program and capital management. Their report published on 22 May discusses in detail the potential upside of 70c and 40c per share respectively from such strategies. Strong operating conditions continue: Management also stressed the strength of the current operating environment and that it expects the current tightness of widebody capacity to underpin the international business for another 12-18 months. This accords with their above-consensus forecasts in FY08, where they forecast 5% growth in unit revenue. Forecasts will need to be reviewed further: Management's prediction of 4% capacity growth in FY08 and 10% thereafter in the international business is much higher than their expectation, which will require them to revisit their fleet capacity forecasts. The analysts' A$5.90 valuation is based on 12x their FY08 EPS forecast, which is in the middle of the current trading range of Qantas' peers and at a 35% discount to the Australian Industrials. Their current price taregt does not take account of the additional A$1.10 in value highlighted in our previous report.

Meanwhile, another stockmarket analyst, Macquarie Research Equities have reviewed their model for QAN and have upgraded their recommendation to Outperform with a lifted share price target of $7.05. Yesterday, shares in Qantas (QAN) rallied to all-time highs after Chief Executive Geoff Dixon said the airline would capitalise on strong operating conditions to engage in a wide-ranging restructure. The analysts have lifted their price target to $7.05 based on an enterprise value to earnings before interest, tax and depreciation (EV/EBITDAR) multiple of 5.5x, in line with the Singapore Airlines and Cathay trading range. Qantas and indeed the industry are in a sweet spot, which is set to continue. Loads and yields are high and QAN's superior franchise and two brand strategy have positioned it capitalised on the strong capacity growth expected in the coming years. Business well positioned for growth: Qantas is looking to lift its international capacity by a compound annual growth rate of 8% over the next three years. With yields and loads at near record levels and the delayed A380s creating pent up demand, the analysts see this capacity providing strong earnings growth in the coming years. The introduction of the fourth cabin will also help to support yields. The domestic business is also expected to grow significantly, with Qantas' two brand strategy and wide body planes positioning it well against growth from VBA and new entrants like Tiger. At least $2bn to shareholders: The recent bid has compelled management to undertake a comprehensive review of its capital management. The analysts are confident that the business can support a return of a least $2bn or 97¢ per share, which would lift gearing to 55%. The cashflows of the business are strong enough to repay this amount over the coming three years. Other businesses under review: Management is also undertaking reviews of Qantas' other businesses. A review of the Frequent Flyer program could see an immediate uplift in cashflow, with some major partner contracts up for renewal. Qantas also highlighted its intention to build a fully fledged express logistics business. Since the market is unlikely to fully value this business within Qantas, The analysts see it as a prime candidate to be demerged, providing further opportunity for capital returns, albeit in the long term. Qantas operates a strong franchise and is well placed with its dual brand strategy to leverage industry growth for the next three years.

Qantas has a restricted broker call and share price target from sharemarket analyst UBS. Initial bid fails but uncertainty continues: The Takeovers Panel denied APA's application to proceed with the offer after it failed to meet the 50% acceptance level in time. Qantas has announced that the bid has failed, but is currently in a trading halt as APA provides clarification in regards to a clause in its offer. If APA is successful in showing that it met the 50% level prior to the deadline then we believe the offer period could be extended. Strong operating conditions to FY08E: the analyst sees a very benign competitive environment at least until FY08E. Traffic numbers remain strong and international capacity growth remains low, both supporting yields. Qantas is currently enjoying 15% growth in international unit revenue. They are forecasting a drop to 4% in FY08 but given the limited capacity expansion for Qantas and the industry our assumptions could be conservative. Currently trading in-line with peers: On they current forecasts Qantas is trading at 12.1x our FY08E EPS. This is roughly in-line with a range of its comparable peers (Singapore, Lufthansa, Cathay). This is also trading at a 65% relativity to the Australian All Industrials average, which is at the upper end of its historical trading range.

Qantas Airways (QAN) has a restricted price target and broker call from stockmarket analyst UBS. The analysts are raising our Qantas EPS forecasts by 6% in FY07 and 9% in FY08 to take account of stronger than expected traffic numbers, changes to their fleet plan, and a review of their yield assumptions. Their new forecasts sit around 5% ahead of management guidance but not far off consensus. The key issue impacting our FY08 forecasts is whether Qantas can sustain its current 15% growth in international unit revenue. They are forecasting a drop off to 4% growth in FY08, but given the dearth of international capacity for Qantas and the whole industry, their assumption could be too low. Each 1% additional unit revenue growth growth equates to 5% extra EPS. Qantas is trading on 12.2x the analyst's new FY08 EPS forecast, which is at the upper end of its most comparable peers (Singapore, Cathay, Air France, Lufthansa). This is also at a 65% relativity to the Australian All Industrials average, which is at the upper end of its historical trading range. Qantas Airways is currently the subject of a A$5.60 all cash bid by Airline Partners Australia, which closes on May 4.

Qantas (QAN) has been approached by Macquarie Bank and the Texas Pacific Group on behalf of a consortium they represent. "The approach is confidential and and incomplete and is being investigated by Qantas," the company said in a brief statement to the Australian Stock Exchange before the markets opened today. The news of a possible takeover rocked the share price, shooting it up to 20 percent higher to $5.25, compare this to the price for a Qantas share in June of just $2.93.