Last week, I presented a stock idea at the Future Generation Investment Forum. Despite owning one of Australia’s most recognisable brands, this company trades on a PE ratio of around nine. Here, I outline why Qantas could be a high-flyer in the coming years.
Qantas has three ‘crown jewels’, that separate it from other airlines, and should demand a valuation premium to other airlines:
- Qantas domestic. Unlike the International division, domestic is highly profitable and accounts for over half of earnings.
- Jetstar. Leading low-cost airlines, such as RyanAir in Ireland and Southwest Airlines in America trade at a significant premium to Qantas.
- Qantas Frequent Flyer. This is the largest, most successful loyalty program in Australia with almost 12,000,000 members.
But on its own, undervaluation isn’t enough. Here are three upcoming catalysts that could see the stock re-rate over the next six months:
- We expect analyst earnings upgrades in August
- Qantas should restore its fully franked dividend this year, for the first time in 10 years
- Re-admittance to the MSCI Index. Last year, Qantas was deleted from this index due to hitting its 50% foreign ownership cap.
Philip is the CIO at Regal and is responsible for the Portfolio Management of the Fund. He is a Fellow of the Financial Services Institute of Australasia, a member of the UK Society of Investment Professionals, and a CA and CFA charterholder.
What about oil prices
What about fleet renewal. Joyce has announced the retirement of 747’s, but with only a limited number of 787’s on order, the loss of ASK’s is huge. No replacement for the 330 fleet, the oldest of which arrived in 2002 and the fleet burns 20% more fuel than the equivalent 787/350 flown by ALL of Qantas’s competitors. No matter what the figures show, no Jetstar entity outside of Australia has ever made money and now JAL is setting up a low cost competitor to Jetstar Japan... Maybe the reason that international loses money (apart from the dinosaur fleet and subsequent fuel costs) is because frequent flyer makes so much money - they are mutually exclusive.