Australia | Aug 22 2007
By Chris Shaw
Just as higher oil prices had little impact on the ability of Qantas (QAN) to post a record profit the same is true of Virgin Blue (VBA), which has delivered an earnings result well in excess of market expectations.
The company’s profit of $231.9m was about 20% higher than Credit Suisse had expected and well above the market’s consensus estimate of $204.5m, resulting in the broker upgrading its rating to Outperform from Neutral.
The upgrade essentially brings the broker into line with the dominant market opinion, as the FNArena database shows the company is now rated as Buy five times and Hold twice, with an average price target of $2.81. Thomson One Analytics shows a median price target of $2.87.
While Credit Suisse’s upgrade in rating was accompanied by increases to its earnings forecasts of 12% in FY08 and 14% in FY09 to 22.9c and 23.8c in earnings per share (EPS) terms, the broker is not the only one revising its estimates higher as UBS and GSJB Were have also lifted forecasts.
The former is now forecasting EPS of 25c in each of the coming two years, while Weres is forecasting 20.9c and 16.9c respectively. Thomson One shows median earnings per share estimates of 21c and 23c.
As UBS notes, such an earnings outcome implies the stock is very cheap as it would equate to a P/E (price to earnings ratio) of only around 8x, far below that of any peer. In the broker’s view this is offset to some extent by the lack of any significant free float given the dominant shareholding of Toll Holdings (TOL) and the fact earnings in FY09 and FY10 will flatten out.
Merrill Lynch sees scope for the ownership situation to resolve itself, the broker suggesting Toll is a likely seller of its stake with Singapore Airlines, Emirates and Temasek all potential buyers if it does look to offload its holding.
This ownership uncertainty doesn’t make the stock a less attractive investment in the view of Credit Suisse, the broker pointing out FY08 earnings should also be strong and with the stock on a cheap multiple that is a good combination for investors.
JP Morgan supports such a view, suggesting the outlook is supportive for further improvement in yields as new capacity allows it to chase a better class of customer. In other words, the additional planes will better able the company to try and attract more business fliers away from Qantas.
Offsetting this is the GSJB Were view the market will become more competitive in coming years, an outcome looking almost assured given Tiger Airlines is set to enter the Australian market.
While this clouds the future outlook ABN Amro suggests the company is approaching the situation in the right way as it looks set to focus on investment this year, which will improve its ability to compete in the future.
The market’s reaction to the result has been subdued, as in early trading today the shares are down 3c at $2.09 despite a stronger overall market.