HOLD Opinion: The flying kangaroo keeps on punching -- Moon

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Date Posted: 06:09:17 04/16/10 Fri
Author: 17th February 2006 (Profit report 2010==Lent)
Subject: HOLD Opinion: The flying kangaroo keeps on punching

QANTAS AIRWAYS LIMITED (QAN)
HOLD Opinion: The flying kangaroo keeps on punching

Fundamental Analysis
EVENT

QAN yesterday reported first-half profit for 2006.

KEY POINTS

Underlying profit after tax (excluding one-off items) of $401.3m, up 32.1%

Underlying EPS (excluding one-off items) of 20.9 cents, up 28.7%

Underlying earnings were calculated by subtracting one-off tax consolidation benefits from reported profit and adding back one-off restructuring charges of $69.6m in the first half of 2006

Fully franked interim dividend of 11 cents declared

ROE increased from 11.4% in the first half of 2005 to 13.2% in the first half of 2006

COMMENTARY

This half’s results highlight the strength in QAN’s underlying business despite the significant pressure on costs from higher oil prices.

The strength in oil prices is expected to continue to hit profitability for QAN in the long term, especially if pricing remains above US$60 a barrel. However, with oil prices currently below US$60 a barrel, there remains potential for a $90m-$100m fall in fuel costs for QAN in the second half of 2006, highlighting a possible upgrade to earnings.

Let’s fly Jetstaaaar!

The restructuring of Qantas’s management emphasises the increased focus on Jetstar, which is likely to replace a significant amount of mainline capacity over the long term as QAN mirrors the successful implementation of the Jetstar platform to international routes.

The above restructuring will provide QAN with the most attractive avenue to increase returns above the company’s cost of capital. However, shorter-term focus remains the aviation policy review by the Federal Government, which QAN Chief Geoff Dixon expects to be released in the coming weeks. This will be an important catalyst for QAN given it will define whether or not competitor Singapore Airlines will be granted access to the lucrative Australia-US route.

Where happy maintaining our HOLD recommendation in anticipation of the government’s pending decision, coupled with short-term weakness in crude prices and the strength in QAN’s underlying business.

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Replies:

Re: HOLD Opinion: The flying kangaroo keeps on punching (NT) -- oil prices currently below US$60 a barrel,, 06:09:58 04/16/10 Fri