Doubts Remain For Qantas

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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

Despite a tough economic outlook Qantas ((QAN)) has delivered a profit before tax for the December half year of $257 million. This was above some expectations in the market. Deutsche Bank analysts, for example, had forecast a result of $217 million.

But as the broker points, out the earnings risk remains squarely to the downside given the current half should prove to offer even tougher conditions than the previous six months, so while management has retained full year profit before tax guidance of $500 million such an outcome is unlikely to be achieved, suggests Deutsche Bank.

Citi agrees, suggesting while promotional spending is to increase in an attempt to lift volumes this is occurring at the same time as the economy is struggling and unemployment is rising, meaning Qantas may find it tough to meet its targets with respect to full year earnings.

As evidence of this, Deutsche Bank is forecasting profit before tax of just $384 million, which suggests the “Sustainable Future” cost cutting program is unlikely to deliver as much in the way of savings as management is anticipating. In Deutsche’s view, the easy cost out options have already been achieved.

In earnings per share terms the broker is forecasting 18c this year and 24c in FY10, which is broadly in line with consensus estimates according to the FNArena database of 18.1c and 24.3c respectively. Post the result, JP Morgan has trimmed its numbers to 16.8c and 17.6c, which tends to support the Deutsche Bank view earnings risk remains to the downside.

Bank of America-Merrill Lynch has cut its numbers by 23% this year and by 25% in FY10 to 12.9c and 22.9c to reflect what it sees as a weak demand environment in coming periods. This also suggests group earnings will struggle to meet management’s current guidance.

Qantas also announced a capital raising of $500 million, a move that caught a number of analysts by surprise. As Bank of America-Merrill Lynch notes, the group’s balance sheet appears to be in reasonably solid shape but credit agencies are looking closely at the company with a view to cutting its credit rating. The broker suspects the move may be an attempt to prevent such an outcome.

ABN Amro agrees, taking the view the capital raising is simpy to avoid a downgrade in credit rating. Deutsche Bank notes it may nevertheless prove to be only a short-term fix and the issue may come up again in the future.

Post the profit result and adjustments to forecasts made by stockbrokers, the average price target for Qantas according to the FNArena database has fallen to $2.65 from $2.83. Overall the database shows the stock is rated as Buy three times, Accumulate once, Hold five times and Sell once.

Shares in Qantas today are down heavily as the market reacts to the result and capital raising and as at 12.15pm the stock was off 40c or 17% at $1.89. This compares to a trading range of $1.84 to $4.87 over the past 12 months.

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