Forecasts Up As Qantas Offers Guidance

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

By Chris Shaw

While it has offered guidance for the first half of the current financial year, Qantas ((QAN)) has been far from specific in indicating profit before tax will be within the range of $50-$150 million. Nevertheless, Citi points out this is better than consensus and has prompted some upgrades to forecasts across the market as analysts factor in stronger loadings, some cost savings and some seasonal benefits.

As an example of the changes, Citi has lifted its earnings estimates by 17% in FY10 and by 9% in FY11 such that its earnings per share (EPS) forecasts now stand at 13c and 21c respectively, while JP Morgan’s EPS estimates are now 12.2c and 22.5c and Credit Suisse is at 18.6c and 21.7c respectively. Consensus estimates according to the FNArena database are 13.7c for FY10 and 24.8c for FY11.

In Citi’s view, the improvement in yields indicated by the guidance is a very good turnaround as it notes domestic yields declined by 10.2% and international yields by 24.2% for the first four months of FY10, highlighting the leverage as pricing power returns to the industry given loads have again pushed above 80%.

The stronger Australian dollar and better performance in freight and from Frequent Flyer earnings has also given a boost to net earnings but for share price outperformance, Credit Suisse suggests the key remains a stepped recovery in international yields, something it expects as fares across the industry are increased to offset higher local fuel costs.

In Credit Suisse’s view this is enough to justify the retaining of its Outperform rating on the stock, supported by a lift in price target to $3.50 from $3.25 given a change in valuation methodology by the broker. But JP Morgan retains its Neutral rating, arguing some of the improvement in yields is simply because comparable months have become less challenging, with yields overall still down compared to the same period last year.

JP Morgan also takes the view the improvement in domestic demand conditions could have allowed Qantas to focus on driving up domestic yields and this would have been a better decision than the one made to boost domestic capacity by 2% over the next 12 months, though it accepts the decision was understandable given competition in the domestic market continues to intensify.

A rolling forward of its model sees JP Morgan’s price target increase to $3.33 from $3.02, while the average price target according to the FNArena database is $3.31, up from $3.21 prior to the updated earnings guidance. Citi is one of the more aggressive with its $3.55 target, suggesting while the update on earnings will see a narrowing of forecasts the stock continues to offer an attractive combination of valuation and earnings upgrades.

Deutsche Bank has lifted its earnings forecasts to reflect the new guidance from management but in contrast to Citi’s Buy rating remains cautious on the stock, pointing out while the domestic operations are improving on the back of the solid Australian economy, Qantas’s international business is still dealing with a relatively weak global economy and increased competition.

BA Merrill Lynch upgraded Qantas to Buy only last week, but believed the market was only assuming a breakeven result in the first half, not $50-150m. Merrills has upgraded its FY11 forecast earnings by 18%, citing the common theme of yield decline rapidly slowing. GSJB Were, however, had assumed $105m in the first half and has thus not made any changes.

Overall the FNArena database shows Qantas is rated as Buy seven times and Hold three times, this ratio unchanged following the update to earnings. The average target price has increased from $3.21 to $3.34. Shares in Qantas today are slightly higher and as at 11.55am the stock was up 3c at $2.91. Over the past 12 months the shares have ranged between $1.38 and $3.06.

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