Qantas: It’s Not The Result But The Outlook, Stupid!

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This story features QANTAS AIRWAYS LIMITED.
For more info SHARE ANALYSIS: QAN
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Qantas ((QAN)) has more than doubled interim net profit to $618.1 million in a result better than the market had expected, but in the washout of its profit report the stock has been downgraded by both Citi and Macquarie.

Both brokers have moved from Buy ratings to Neutral recommendations, not because of any disappointment with the result but because they see issues in the future from higher fuel prices and the potential for some customer resistance to higher fuel surcharges. Citi sums it up by suggesting FY08 may prove to be the peak for the current earnings cycle.

The broker estimates the company’s fuel bill could be as much as $800 million higher in FY09 and as a result it has trimmed its forecasts for FY09 by 9% to 54c in earnings per share (EPS) terms, which compares to its estimate of 56c for FY08 and the 37c achieved in FY07.

As Macquarie notes the company was able to offset higher fuel costs in the period via favourable currency movements and fuel price hedging, but future periods are unlikely to enjoy similar benefits. On the broker’s numbers the company will face an increase in its fuel bill of around $240 million in 2H08 despite being 80% hedged, with FY09 looking even more difficult given hedging falls to 25%.

To reflect this the broker has trimmed its forecasts in coming years and now anticipates EPS of 54.8c in FY08 and 47.6c in FY09, which is similar to the forecasts of UBS of 54c and 48c respectively, the latter year estimate being cut by 18% post the result to reflect higher assumed fuel prices.

Others agree earnings for the group are peaking, JP Morgan suggesting this is the case even though forward bookings are around 40% higher than was the case a year ago. Merrill Lynch already pointed all this out a while ago and suggests the likely earnings slowdown in the current half will probably extend into FY09, which supports its Sell rating.

Deutsche Bank has retained its Hold recommendation but also expects earnings growth to slow as the airline faces some capacity constraints and also has significant capex commitments in coming periods and this is likely to limit any upside.

As earnings estimates have been trimmed so too have price targets, Macquarie dropping its target to $5.48 from $7.05, Citi to $5.00 from $6.00 and UBS to $5.50 from $6.70. As a consequence the average price target according to the FNArena database now stands at $5.73 compared to $6.14 prior to the result. This compares to a median price target according to Thomson One Analytics of $5.84.

The database shows the stock as rated as Buy four times, Accumulate once, Hold four times and Sell once, compared to six Buy ratings prior to the result.

Shares in Qantas today are slightly higher despite a weaker overall market and as at 1.05pm were up 5c at $4.50.

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