FY17 results highlights:
Source: Qantas
Key points:
- Qantas’ underlying profit before tax of AUD1.4bn, while 8.6% lower than per corresponding period (pcp), is the second highest in the airline’s operating history. It was slightly above Qantas’ guidance range shared in May 2017, supported by the stronger domestic businesses
- The group’s business segments reported mixed performances:
- The airline’s group domestic business i.e. Qantas and Jetstar combined achieved a record underlying EBIT of AUD865m (an increase of 5.5% pcp). The domestic business was also strong against its competitors, and achieved 90% of total domestic EBIT share as compared to a capacity share of 61%. Qantas’ dual brand domestic strategy – via its Qantas Domestic and Jetstar Group brands – also continued to increase its margin advantages to 9 and 16 points over Virgin Australia Domestic and Tigerair Australia, respectively
- The Qantas Loyalty division reported a record underlying EBIT of AUD369m (up by 6.6% pcp), with double digit earnings growth in 2H17, mainly due to strength of the core Frequent Flyer program
- While the international business’ underlying EBIT was down by 36% pcp to AUD327m, largely driven by high levels of capacity growth, it was still the second highest result in the airline’s operating history
- On the other hand, the Freight division experienced a 27% decline in underlying EBIT, primarily due to the higher levels of wide body capacity in the international market; while the domestic market share continues to be stable
- Qantas has delivered more than AUD2.1bn in benefits from its Transformation Program, and achieved sustainable group operating margins and net free cash flow for the group
Source: Qantas
- Net debt reduced by AUD434m to AUD5.2bn pcp, and more than 60% of the group’s fleet is debt free, representing an unencumbered asset base of around USD3.8bn. Qantas also benefits from a strong liquidity profile with access to AUD1.8bn cash and another AUD1bn in undrawn facilities
- On 28 August 2017, Qantas announced a reorganisation of its executive leadership team, with the transition to begin in November 2017. The new structure is aimed at ongoing improvement and innovation, as the group transitions out of a major turnaround phase over the last few years
A link to the results is available here.
Outlook
The group’s guidance for FY18:
- Fuel costs (after hedging) no more than AUD3.16bn
- Net capex at AUD3bn for FY18 and FY19 combined
- Inflation impact on costs (including wage growth) around AUD250m
- Gross benefits from next wave of ongoing transformation (including cost, revenue and fuel efficiency improvements) of AUD400m per annum
Relative Value
Prices accurate as at 25 August 2017 but subject to change; indicative only
Source: FIIG Securities, Bloomberg
As highlighted by George Whittle in his article entitled “A steady descent for Qantas bondholders” on 8 May 2017, investors in Qantas bonds since March 2013 have benefited substantially from positive operating conditions and a return of the bonds to investment grade.
We also believe that Qantas’ bonds are expensive on a relative value basis, especially when compared to Virgin Australia Holding’s senior unsecured bonds. Figure 1 shows that Qantas’ bonds ranged between 3.5 to 4.2% on a yield to worst basis (YTW), compared to Virgin’s bonds with YTW of between 6 and mid 6%.
However, it is important to note that Virgin’s bonds are speculative grade rated, which is multiple notches below Qantas’ investment grade ratings. Investors should be aware that although they are receiving a higher YTW on the Virgin bonds, we believe they are not getting compensated for the additional risks.
Figure 1: Qantas versus Virgin
Note: Prices accurate as of 25 August 2017 but subject to change; indicative only
Source: FIIG Securities, Bloomberg