Ord Minnett Research Recommendation: Qantas Airways (ASX: QAN)
Qantas Airways reported a first-half FY22 underlying loss before tax of $1.3bn, 3% ahead of Ord Minnett’s forecast. Revenue rose 32% year-on-year (YoY), led by Qantas International where revenue increased 82% aided by freight. Costs were higher than we expected, however.
By segment, Qantas International revenue rose 75% versus pre-COVID levels, although Qantas Domestic, Jetstar and Loyalty all missed our estimates given the impact from the Omicron wave and border restrictions on activity. The Loyalty business came in below our optimistic assumptions, while earnings were largely flat, despite revenue per member increasing 8% YoY, and on track to generate $1bn cash in FY22.
With staff returning to work and Qantas carrying costs ahead of revenue recovery, FY22 is proving to be another difficult year for earnings. Omicron and border restrictions have effectively kicked the can another six months down the road, leading management to temper its fourth-quarter capacity expectations. That said, with forward bookings strong, domestic activity set to accelerate from March as mask rules are relaxed, and the reopening of international destinations, we believe the final destination is now in sight.
Management forecasts 2H22 underlying operating earnings will see a $650m impact from Omicron post mitigation, with $180m in ramp-up costs also expected to be incurred in the second half as activity recovers. Fourth-quarter capacity guidance was slightly reduced, with management estimating domestic and international capacity at 90–100% and 44% versus pre-COVID levels, respectively.
Rebasing for the interim result has driven a significant reduction in our FY22 operating earnings forecasts, to a loss $104m from $714m, as 2H22 ramp-up costs hit the bottom line. Thereafter, we have reduced our estimates by 2–7% over FY23–24, with improved capacity and yields offset by higher fuel costs, as we adopt our house view of long-term Brent prices of US$80/bbl, up from US$65/bbl. We maintain our Buy recommendation, while we have lowered our target price to $5.95 from $6.15.
Walter Watson
RESEARCH EDITOR
Walter is the Editor of Ord Minnett's retail investor publications, such as the Opening Bell, Ords Weekly and the Ords Monthly, along with various investment guides and investor information published by Ord Minnett.