Brokers Relatively Unmoved As Qantas Slashes Guidance

This story features QANTAS AIRWAYS LIMITED. For more info SHARE ANALYSIS: QAN

By Chris Shaw

Having previously guided to full year earnings for FY09 of around $500 million, Qantas ((QAN)) yesterday revised this number to something between $100-$200 million, giving as reasons an unprecedented fall in demand for its international services in particular and an associated fall in yields on operations.

Post the news stockbrokers in Australia have been busy scaling down their previous earnings estimates, with for example RBS Australia cutting its FY09 and FY10 numbers by 73% and 52% respectively, UBS lowering its forecasts by 75% and 44% for the same periods and Macquarie taking 80% off its estimates for both years.

According to the FNArena database consensus earnings per share (EPS) forecasts for the company now stand at 7.9c this year and 16c in FY10, down from closer to 17c and better than 20c respectively prior to the announcement. The target share price impact has been somewhat more muted however, the database showing the average price target for Qantas shares has fallen to $2.11 now from $2.33 prior to the update.

The most surprising thing given the magnitude of the earnings downgrade has been the lack of ratings downgrades as only RBA Australia has revised its view, moving to a Sell recommendation from Hold previously. This puts the broker in the position of being the only one in the FNArena database to recommend being out of the stock, arguing the share price rally (the stock actually closed higher yesterday despite the revision to earnings expectations) is not sustainable in the face of the downgrades to forecasts flowing through as a result of management’s revision to guidance.

As well, the broker points out there are no signs operating conditions for the company are going to get better anytime soon, meaning while the stock looks relatively cheap given at current price levels it is trading at less than book value, there are no catalysts that will see this value realised.

Citi in contrast is sticking with its Buy rating post the update as it too sees value in the stock, albeit on a longer-term timeframe. Similarly, Bank of America-Merrill Lynch rates the stock as a Buy, taking the view management is clearing the decks with this announcement and this will help restore profitability in coming years.

As well the broker points out the company is undertaking an aggressive cost cutting approach via a reduction in staff numbers and delays to new plane orders and along with its strong balance sheet this means the company is well placed to recover as demand improves. On UBS estimates this could be in 2010, which supports another Buy rating.

Macquarie recognises the same value in the stock but is taking a position between the two extremes, pointing out while a re-rating must eventually occur, this rerating could take some time and this means a Neutral rating is most appropriate at present. This is the same argument as JP Morgan presented in its latest review of the company.

Overall the FNArena database shows a total of three Buys, five Holds, one Reduce and one Sell recommendation. Shares in Qantas today are slightly weaker in early trading and as at 10.50am the stock was down 7.5c or 3.8% at $1.925. This compares to a range over the past year of $1.38 to $3.75.

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