Qantas delivered its FY16 results, with a record underlying profit before tax of $1.53bn, up 57% on the prior year and only slightly below consensus forecast of $1.57bn
As highlighted in the profit below, year on year (YoY) profit growth can be largely attributed to a $664m (17%) reduction in fuel costs to $3.2bn, with the cost benefits of Qantas’ transformation program and higher net passenger revenue offset by activity related cost growth, wage and other inflation and FX impacts on non fuel expenditure.
In addition to the strong profit result, the 52% growth in net free cashflow to $1.67bn was a key highlight of the result. All business segments delivered strong results, however Qantas flagged weakness in its domestic and international segments emerging in the second half. Domestic revenues decreased by 2% and capacity reduced of 1%, with the company highlighting a tougher 2H16 trading environment as well as the resources downturn. In addition, international unit revenues decreased 5% in 2H16, amid competitive market pricing resulting in a full year international unit revenue decrease of 1%.
Key FY16 results
Source: Qantas
From a credit perspective, one of the more interesting parts of the presentation was Qantas’ discussion on its optimal capital structure shown below:
Source: Qantas
Qantas’ FY16 net debt of $5.6bn was within its target net debt range of between $4.8b and $6.0b (based on current invested capital of ~$9bn). The company has delivered on its target capital structure and investment grade credit rating. Going forward, Qantas will look to maintain net debt within this range. If excess capital is generated through, for example, continued strong financial performance, Qantas will increase shareholder distributions and invest in growth capital.
If earnings and cashflow generation remain healthy, we see the pace of further debt reduction slowing and the airline moving towards increasing dividends. As part of the FY16 result the airline paid a final dividend to shareholders of 7c per share, its first dividend in seven years (noting since then the company has returned capital to shareholders through other means such as share buybacks and capital returns).
Following the strong FY16 result, yields on Qantas bonds tightened by around 5 basis points and are being offered at following indicative yields to worst (in both cases being the yield to maturity):
- 2021 bond: 3.86%*
- 2022 bond: 3.93%*
While we expect Qantas’ earnings growth rate will level out, performance and cashflow generation is expected to remain healthy in a low oil and fuel price environment. However, please note that airline sector earnings are highly sensitive to changes in underlying variables - foreign currency and fuel prices as well as heightened competitive pressure as Qantas is experiencing in the international segment.
A link to the announcement is available here.
*Note: Pricing indicative and accurate as of 29 August 2016.
Please contact your FIIG representative for further information on the Qantas AUD bonds. Available to retail and wholesale investors at a minimum face value of AUD10,000.