In Brief: Airlines, Pathology & Seek

This story features ALLIANCE AVIATION SERVICES LIMITED, and other companies. For more info SHARE ANALYSIS: AQZ

Weekly Broker Wrap: Morgans flies high in the airline sector; Macquarie explains the macro tailwinds for growth in pathology; Seek is catching the broker’s attention; Jarden highlights its favourite consumer discretionary stocks, and Trump 2025 tariffs warning

-Airlines setting themselves up for growth
-Boomers a boost for diagnostics services
-Seek laying the groundwork for upside
-Who is buying what?
-Trump’s tariffs ringing warnings bells

By Danielle Ecuyer

Food for thought quote of the week.

“Morgan Stanley’s Global Investment Committee, however, believes investors cannot afford to be complacent about potential policy changes especially at a time when the sustainability of U.S. debt is in question, the economy is slowing and the Federal Reserve is still seeking evidence that inflation is under control.”

[Lisa Shallett, Morgan Stanley]

Dear Reader: If you find any interesting investing quotes that spark the creative investing juices, email them to info@fnarena.com with your name, if you are happy to be published alongside the quote, with a brief sentence on why you think it is great.

Come Fly With Me, Let’s Fly Away

Morgans checks in on Alliance Aviation Services ((AQZ)) and Qantas Airways ((QAN)) for a review of what is expected for the upcoming FY24 earnings reports on August 14 and August 29, respectively.

Is Alliance Aviation caught in a debt trap?

The broker is looking for net profits of $85.5m for Alliance compared to $56.6m in FY23 with the analyst “unclear” on whether the earnings growth will be driven by the divestment of five E190 engines or the result of stronger business trading conditions.

Alliance has and continues to undergo a major fleet re-equipment program which is creating upside potential cashflow generation in the medium term, but investor concerns in the short term remain focused on debt.

The fleet will expand from 36 aircraft pre-covid to around 93 aircraft, with 98 assumed to be in operation by FY28. The result is a substantial uplift in debt levels, which the Morgans’ analyst attributes as one of the main reasons for the share price underperformance.

The broker expects net debt to peak in the 1H25 and the airline will be able to generate circa $100m in free cash flow once all 98 aircraft are operational.

While several strategic financing moves by Alliance have alleviated concerns over the future cashflow versus debt levels, Morgans emphasises investors and the market will be seeking out more clarity and transparency on the FY25 outlook, as well as when the company will be able to start deleveraging and reap the cash flow benefits of the fleet investment.

Morgans retains an Add rating and a $4.75 target price.

The average target price from the daily covered brokers is $4.55.

Qantas moving on from the FY24 reset

Morgans anticipates Qantas will probably achieve consensus earnings forecasts of $2.09bn in net profit before tax, but for reasons unknown the broker has stuck with own estimate at $2.075bn. If correct, the result would represent a -16% decline on FY23, but EPS is only forecast to decline by -7%, because of the $1bn share buyback.

Another $300m buyback is expected to be announced in the results.

FY25 is shaping up to be a much better year for Qantas the analyst believes, including the resumption of fully franked dividends.

Despite a hefty $3.7bn-$3.9bn capital expenditure program, the broker views cash flow forecasts for the year ahead as too conservative. Morgans is looking for earnings upgrades with better operating performance, the benefits of new aircraft and the reversion of Freight headwinds to tailwinds.

If Qantas can establish sustainable cashflows and margin improvements, Morgans envisages the shares can re-rate. Given the strong ongoing demand for travel, the attractive valuation and strong balance sheet, the stock is rated Add with a target price of $7 per share.

The average target price from the daily covered brokers at FNArena is $6.725.

Pathology services finding growth 

Macquarie turns to diagnostic services for an improved growth outlook with macro tailwinds positioning the industry for higher growth over the next two years.

From FY09-FY19, diagnostic imaging and benefits grew 5% and 7%, respectively, with growth rates of 5% and 2% post covid (FY20-FY23), the broker details.

Looking ahead, Macquarie has a more upbeat outlook for the industry to expand at around 7% and 6% for FY25 and FY26, respectively, underpinned by population growth, aging demographics, utilisation, and indexation.

The percentage of the population aged 65 years and over is forecast to grow to 19% of the total population by FY30 from 13% in FY09. Equally, the rate of growth for 65 and over is expected at 3.4% p.a. against those of 65 and under at 1% per annum.

Older age groups account for a higher proportion of diagnostic services and typically use the services more.

Other positive factors include a shift in the diagnostic services mix to MRIs which will be supported by policy changes. MRI average fees per event result in a better contribution to diagnostic services benefits.

Equally. rates are being indexed at around 2% for FY26/FY27 in line with FY25.

Across the universe of stocks in the sector, Macquarie is most upbeat on Integral Diagnostics ((IDX)) with a $2.65 target price and the analyst forecasting double-digit EPS expansion for the company in FY25/FY26, post a successful Capitol Health ((CAJ)) merger. Outperform rating.

Capitol Health is rated Outperform with a 32c target price. Healius ((HLS)) and Sonic Healthcare ((SHL)) are both rated Neutral with $1.45 and $26.10 target prices, respectively.

Cocktail snack with Seek

Barrenjoey retains an upbeat view on Seek ((SEK)), while highlighting it appreciates the market’s and investors’ caution around a potential FY25 earnings downgrade.

In the last week Seek has increased prices around 2%-4% across its basic, standout, and premium services, with Barrenjoey highlighting management’s propensity to adjust prices both up and down to test price elasticities.

The analyst proposes the rises are a positive signal for the company to put through increases into FY25 at a time when the jobs market is potentially continuing to soften and yet to bottom out.

Equally, a price decrease wouldn’t surprise the broker.

JP Morgan was also on the Seek case post the -17% year-on-year decline in national job volumes in June, pointing to a slight improvement on the May and April falls.

This broker reminds us the company’s FY24 guidance was contingent on job ads remaining stable in the 2H24 and highlights Bloomberg consensus forecasts are scrapping along the bottom of management’s guidance.

Job applications have conversely increased by some 3% sequentially (month-on-month) and are up 62% on the year in June, which is indicative of less job ads. Importantly it does offer a “stronger platform for Seek to pass through price/yield”, the analyst states.

On balance, Seek is trading at a lower valuation to its online classified peers around 20x FY26 earnings excluding the Growth Fund, compared to Car Group ((CAR)) on circa 30x and REA Group ((REA)) on circa 40x, Barrenjoey observes.

Barrenjoey acknowledges some investors will be awaiting a potential downward revision in consensus FY25 earnings estimates and or in combination with a flattening out in the A&NZ job volumes. Overweight rating and $29.50 target.

JP Morgan is also bullish with an Overweight rating and a $26.50 target price which includes the Seek Growth Fund at the last reported book value.

The broker emphasises Seek stated FY28 revenue could achieve $2bn on the back of very robust low-double-digit compound growth rates and boosted further with capacity to produce EBITDA margins of over 50%.

This assumes A&NZ volume growth in the low to neutral single levels, A&NZ yield growth of high single digits and Asia revenue growth of low double digits.

FNArena’s average target price for daily covered brokers is $29.20.

The shifting sands of discretionary retail stocks

Jarden dissected the results from its 41st online tracker case study revealing a 2.3% lift year-on-year with footwear and soft goods the outperformers, up 17% and 46%, respectively. 

Conversely, meal kits, marketplaces and hardware fell -14%, -12% and -11%, respectively, on the year for June.

Demographically, older customers (aged 45-65 plus) slowed online spending by -280bps across most categories ex-footwear.

Did I miss a Jimmy Choo sale? Only joking!

Young adults (aged 23-24) gained the most, rising 170bps, which would not be a surprise to our postman. The categories that gained the most were hardware, grocery, and travel.

The gain in travel for the younger market offsets the decline of footwear and marketplaces, the analyst states.

Companies with a skew to the younger demographic includes Woolworths Group ((WOW)), Coles Group ((COL)), Amazon, and JB HiFi ((JBH)).

The older demographics skewed more to Athlete’s Foot ((SUL)) (walking trips in the Camino de Santiago?), home hardware ((WES)), IGA ((MTS)), and Beacon Lighting Group ((BCE)).

The broker assesses online adoption is more mixed as the younger generation continues to grow while older demographics decline.

Tax cuts are expected to benefit food including Coles, Woolworths, and Metcash, liquor, including Endeavor Group ((EDV)) and Metcash; gaming, Endeavor, and quick service retail, including Collins Food ((CKF)) and Domino’s Pizza Enterprises ((DMP)).

Jarden remains more positive on companies with “long share runways, expansion plans and improving return on invested capital” and favours travel stocks, Flight Centre Travel Group ((FLT)), Helloworld Travel ((HLO)), Webjet ((WEB)); global growth via Treasury Wine Estates ((TWE)), Domino’s, Lovisa Holdings ((LOV)) and “category killers” taking market share in Temple & Webster ((TPW)) and The Reject Shop ((TRS)).

The broker envisages longer term value in grocery but sees the regulatory inquiries and sluggish market growth as impediments to outperformance.

Cutting to the Presidential chase

Wilsons’ deep dive into how markets might respond to a Trump versus Biden victory at the November elections is sobering.

On balance, another Biden term (which is currently looking unlikely) represents broadly more of the same for markets.

Another Trump term is anything but business as usual.

The proposed 60% import tariffs on China and an across the board 10% tariff on imports would represent an increase to almost 17% against the current 3% and would result in the highest tariff structures since the 1930s.

Wilsons explains the tariff introduction, which was already proposed by Trump in 2018, could be easily implemented as much can be done without the involvement of Congress.

The broker believes the Trump policies will be more inflationary from a combination of higher tariffs with tighter immigration and markedly lower growth in the labour force, leading to more expensive import prices and potential labour market shortages.

In combination, the policies would act against the Fed’s inflation measures. 

Speaking of the Federal Reserve, Chairman Powell, whom Trump appointed, would likely take an exit stage left. His tenure expires in May 2026.

Wilsons views the appointment of a more amenable “dovish” Chairman as not a straightforward process.

But extreme criticism and dovish pressure on the FOMC could at least optically, if not in reality challenge the independent mandate of the organisation.

Wilsons states markets could well be under-pricing the risk of a global trade war and longer-term possible negative impacts of rising US/China geopolitical tensions.

Under both candidates the fiscal deficits are expected to grow, however, either Presidential candidates will require Congress as “Congress holds the purse strings”.

A one-party sweep across the Senate and the House would likely result in higher fiscal deficits and Trump has promised to extend the personal tax cuts which are due to expire at the end of 2025 at a cost of -US$4trn over 10 years.

Trump has also discussed reducing the corporate tax rate to 20% from 21% with an expectation the new tariffs will fill the revenue void.

Wilsons likes gold as an inflation hedge, accounting for geopolitical shocks, higher deficits, and debt concerns.

Green energy comes out as the big loser under Trump, with a promise to repeal the Inflation Reduction Act. The Republicans would need Congress to achieve the wind back.

Wilsons concludes the sequencing of Trump’s policies in the event he wins will impact on markets. Tax cuts for example in 2025 would boost the economy, but tariff hikes, immigration curbs and an “attack” on the Fed could have more negative market implications.

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