1/12/2008==Sell==bad news piles upits record low of $1.56 from 1996 -- Moon

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Date Posted: 05:52:52 04/16/10 Fri
Author: .A failure at support at $2.10
Subject: 1/12/2008==Sell==bad news piles upits record low of $1.56 from 1996

QANTAS AIRWAYS LIMITED (QAN)
Last Price Change +/- Risk Level
SELL Crash landing $ 2.98 +$0.020 CORE

Event
QAN shares continues to slide as bad news piles up

Key Points
Fuel price scares now replaced by sluggish consumer sentiment

Slowing economy sees QAN restructuring, cutting costs

FY09 downgrade confirmation that worst isn’t over

Fundamental Analysis
Qantas Airways Limited (QAN) is one of the world’s leading airlines and an Australian icon.

On top of its standard domestic and international flights, QAN also owns budget airline Jetstar, regional airline QantasLink and related travel businesses Qantas Flight Catering.

QAN has had a difficult time recently, as a slowing global economy has impacted on passenger numbers and high fuel prices mid-year belted the airline. However, the future looks as dire as possible now that QAN has announced that its FY09 earnings will drop by nearly two thirds.

The company’s world-famous safety record has also come under scrutiny after a series of maintenance and safety mishaps in recent months.

Oil issues hit first

When oil prices hit all-time highs mid-year, QAN was one of the most at-risk local companies.

And with the record oil price being the second major catalyst for global sharemarkets falling behind the financial crisis, the oil crash saw transport companies amongst the worst hit.

The higher oil prices lead to a major increase in airlines’ jet fuel bills, and took a massive chunk out of the industry’s profits. Wage pressures were also squeezing the company’s bottom line, contributing to a major sell-off of QAN’s stock.

QAN shares are now down over 60% in less than a year, and last year’s $11 billion takeover offer for the airline seems like a distant dream.

The downhill slide

QAN’s stock slide since the start of 2008 looks like a killer skiing slope on the company’s chart, reflecting a string of escalating problems across the year.

On 18 July QAN tried to address the record-high fuel issue by restructuring, including the slashing of 1,500 jobs, scrapping plans to boost flying capacity and opting out of hiring a further 1,200 staff.

The airline already saw a dismal year ahead, and reduced its forecast capacity growth for FY09 to zero from 8%.

In September QAN was forced to push back plans to float its Frequent Flyer business until 1H09 thanks to the market volatility.

Late October brought more grimness, as QAN admitted that its forward bookings had dropped thanks to sluggish consumer confidence and a low Aussie dollar.

QAN also said that revenue seat factor – a key measure of how many seats the airline fills across its flights – fell 2% in August from last year’s 77.7% figure. The month also saw mainline operations fall 6.2% in domestic passenger numbers and 6.4% in international.

Meanwhile QAN’s discount airline, Jetstar, was doing its best to keep QAN afloat, increasing passenger numbers by 11% domestically and by 41% on its new international network.

Financial fright

QAN posted its full-year results in August, which included a 44% jump in earnings to a record of $969 million.

However, this included a $291 million in payments from aircraft manufacturers to compensate for delays in delivery of ordered aircraft.

The result was below an analyst consensus of $1.019 billion but ahead of the company’s own guidance.

FY08 was as good as it would get for QAN, with the market now a much more difficult beast. It wasn’t until last week that QAN admitted how much its coming FY will suffer. The airline said earnings will drop by nearly two thirds, forecasting profit before tax of around $500 million for FY09, down significantly from $1.41 billion last year.

End of airline era?

QAN’s recent profit downgrade is the result of slower demand, especially across its mainline international operations.

QAN has announced that it will be also reducing capacity, grounding 10 aircraft, dropping leases for two planned Airbus A330 aircraft, and halting all planned domestic growth for its mainline and discount Jetstar airlines.

This recent downgrade hasn’t come as too much of a shock to the market. QAN’s peers, such as Virgin Blue, have also suffered recently, with VBA recently announcing it was reviewing capacity growth forecasts thanks to slowing economic conditions.

Looking ahead

QAN now hopes that it will be saved by consolidation within the global airline sector, though this probably won’t take place for a few years (if at all). At present, the Australian government limits overall foreign investment in QAN to 49%, caps any single foreign investor at 25% and forbids other airlines from owning more than 35% in total. Serious policy changes will have to arise for consolidation to be a consideration.

And while fuel prices are coming down, this won’t be enough to save QAN. QAN’s fuel expenses are capped when crude rises above US$106 per barrel, but market conditions are so bad that fuel joy will fail to offset any market negatives. The falling Aussie dollar means QAN hasn’t fully benefited from the fall in oil prices.

QAN’s discount airline, Jetstar, won’t be enough to keep the company afloat, either, with Australian consumers reluctant to spend money on air travel in this cash-strapped consumer market.

Despite heavy falls in recent months, we see more pain ahead. We don’t have any specific shorting levels at the moment, but will advise if a safe setup presents.

Key Data - Ratios (Guide)
Sector Transportation
Weight in Sector 19.60% Market Cap $ $6.8 b
Year Hi/Low $3.06 - $1.74 Next Report August
Dividend Months Sep 10 Apr 11 Apr 11 Ex-Dividend Date N/A
1 Yr Return + 2.53% 1 Yr Return vs Market + 2.17%
Net Tangible Assets (NTA) $3.18 Price/NTA 0.94
Return on Assets (ROA) 14% Return on Equity (ROE) 17%

Forecast Numbers Current 1 Yr(exp) 2 yrs(exp)
Net Profit After Tax (NPAT) $969.0 m $326.0 m $516.5 m
NPAT Margin 6% 2% 3%
Earnings Per Share (EPS) $0.50 $0.17 $0.28
Price/Earnings Per Share (P/E) 6.0 17.5 10.6
Operating Cashflow $2.7 b $2.5 b $2.1 b
Operating Cashflow Per Share $ 1.19 $ 1.11 $ 0.93
Price/Operating Cashflow Per Share 2.5 2.7 3.2
Earnings Yield 16.78% 5.70% 9.40%
Dividend Yield 11.74% 3.36% 6.38%
Franking Credit Level 0% 100% 100%

Technical Analysis

QAN has had a turbulent trading history over the past decade. During the period, it managed to climb from around $1.50 to its all-time high of $6.06.

However, QAN’s uptrend stalled in December last year despite no notable technical reversal signals.

QAN's latest downtrend has been severe, as the airline has lost more than 60% of its value in less than a year.

Even the long-term uptrend support line failed to hold QAN from falling further, which has seen the $2.10 support come under serious threat.

A failure at support at $2.10 should see QAN trade towards its record low of $1.56 from 1996.

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Replies:

record low of $1.56 from 1996. -- to its all-time high of $6.06.===by 2==equals=3.03, 05:55:46 04/16/10 Fri