Australia | Nov 23 2006
By Chris Shaw
Any potential takeover for Qantas (QAN) has wide ranging implications from job losses to competition concerns, but one side effect of any deal is the possibility of an earnings impact on Allco Finance Group (AFG) given the company is a player in the global aircraft leasing business.
Currently Allco has leasing deals with Qantas for a number of planes but as the company and Macquarie both point out, there will be no impact on earnings this year as all the leases are 8-12 year deals and are likely only breakable in the event of a default by the airline.
Macquarie suggests such an outcome is unlikely, but in the event it occurred or the Jetstar fleet was returned to the company it would be little cause for alarm as the planes could either then be sold or re-leased in what is a liquid secondary market.
Longer-term there is some potential earnings impact though, the broker estimating the end of the leasing relationship with Qantas could cost the company as much as 10% of its earnings. Citigroup’s assessment is not as severe, the broker seeing only 3% of earnings in FY08 as at risk from the ending of any leasing agreement between the two companies.
This appears unlikely following the company’s comments this morning though, as it has advised the market it is considering a proposal to join the consortium considering a bid for the airline.
The broker notes the company’s aircraft leasing operations generally were stronger than expected in the September quarter, and along with better than expected investment flows in the half year to date have the company well placed to report a strong half year result.
Despite this the broker notes the stock has done little in recent months, which has improved its relative valuation enough for the broker to upgrade its rating to Buy from Hold.
Citigroup is forecasting earnings per share for FY07 of 63.4c, increasing to 77.3c in FY08 and 90.1c in FY09 and has lifted its rating to Buy from Hold, while also increasing its target price to $12.00 from $11.45.
Macquarie is even more bullish on earnings, forecasting 67.4c in FY07, 84.2c in FY08 and 103.1c in FY09, while pointing out there remains potential for upgrades to these estimates given the ongoing strength of the investment banking market. By way of comparison, Thomson One Analytics shows median earnings per share forecasts for the stock of 64c, 78c and 89c over the next three years.
The FNArena database shows the stock is rated as Buy four times and Accumulate and Hold once each, though only Macquarie and Citigroup have updated their coverage to account for the potential impact of a bid for Qantas.
The average target price according to the database is $12.57, Macquarie leading the way with a $13.45 target. The median price target according to Thomson One stands at $12.05.
Shares in Allco are sharply higher today, as at 12.20pm the stock was up 88c at $11.20.