Qantas Airways: Still flying along
About the author:
- Author name:
- By Billy Boulton
- Job title:
- Associate Analyst
- Date posted:
- 24 February 2023, 8:00 AM
- Sectors Covered:
- Agriculture, Travel, Chemicals, Food & Beverage
- Qantas Airways' (ASX:QAN) 1H23 result was strong with underlying NPBT at the top end of its guidance range driven by strong travel demand, high airfares, and cost improvements from its A$1bn transformation program. Cashflow, balance sheet and capital management were the highlights.
- We are perplexed at QAN’s share price reaction today. It provided bullish outlook commentary around the strength of travel demand likely continuing well into FY24, which we thought would have driven a rerating. We continue to view the discount being applied to QAN vs pre-COVID multiples as unwarranted. Add maintained.
1H23 result was a record
Available seat kilometres (ASKs) increased ~310% to 55,438m, revenue increased ~222% to A$9.9bn, underlying EBIT was A$1.5bn and underlying NPBT was A$1.43bn, at the upper end of guidance of A$1.35-1.45bn.
RASK materially above pre-COVID underpins earnings
Across the group, RASK (revenue per ASK) for 1H23 was 46% above pre-COVID levels reflecting materially higher ticket prices. Group domestic RASK was up 23% and Group International RASK was up 57%.
The strong RASK momentum across the group more than offset QAN’s record fuel cost and temporary unit cost inefficiencies, whilst delivering record earnings in Domestic and International. We note that 1H23 Domestic underlying EBIT was A$785m marginally ahead of FY19 EBIT of A$778m (record full year result).
Operating cashflow increased to A$2.8bn vs (A$1.5bn in 1H20) driven by higher earnings and the continued rebuild of revenue received in advance (RRIA). QAN’s cashflows are now higher vs pre-COVID. Net debt reduced to A$2.4bn, well below the bottom end of it target range of A$3.9bn.
This saw QAN announce a A$500m on-market share buyback (MorgansF was A$400m) and increase its FY23 capex guidance by A$400m reflecting a prepayment to Airbus for future aircraft deliveries.
Given QAN’s prudent financial framework, we assume this prepayment is a better outcome for shareholders than if QAN were to hold onto the cash.
Strong travel demand likely to remain for 2H23/1H24
QAN did not provide any formal FY23 guidance. However, it did say that it expects travel demand to remain strong throughout 2H23 and FY24. QAN has so far not seen any change in demand despite the macroeconomic uncertainty and consumers continue to prioritise travel spend over other categories.
Group Domestic revenue intakes are currently at ~112% vs pre-COVID levels with Leisure at ~120% and business-purpose at ~100%. Group international revenue intakes are at ~113%. This indicates that demand remains strong, with these revenue intakes implying strong forward bookings for the remainder 2H23.
As overall market capacity is restored in the 2H23, RASK is expected to moderate vs the 1H23, however remain materially above pre-COVID levels. Increased capacity will also drive improved unit cost efficiencies, partly offsetting lower RASK.
FY23 Loyalty guidance was effectively upgraded with QAN saying it was on track to deliver underlying EBIT in the top end of that range of A$425-450m. This provides confidence for QAN to achieve its FY24 Loyalty target of A$500-600m.
We have decreased our FY23/24/25 EPS forecasts by 5.5%/6.0%/1.7% reflecting: updated capacity guidance; historical earnings seasonality; higher than expected 1H23 unit costs; slight increases to our RASK assumptions; lower unit fuel cost given reduced guidance; lower net interest given FY23 guidance; increased capex given FY23/24 guidance and changes to expected aircraft deliveries in FY25/26; and a larger than expected 2H23 buyback, we also now assume A$800m of shares are bought back in FY24.
As a result our valuation has fallen slightly to (login to view).
QAN is trading on an FY23F EV/EBITDA and PE of 3.1x/6.5x, which is a ~23%/28% discount to its historical 5-year pre-COVID average multiples of ~4.0x/9.0x, despite having structurally higher earnings, a much stronger balance sheet, a better domestic market position, a higher returning International business and more diversification (stronger Loyalty/Freight earnings).
QAN’s balance sheet strength also positions it extremely well for its upcoming “EBIT-accretive” fleet reinvestment, whilst leaving significant headroom for further capital management.
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