Ord Minnett Research Recommendation: QANTAS Airways (ASX:QAN)
Qantas Airways provided a strong trading update for the first half of FY23 year-to-date, giving increased confidence in both the domestic and international travel demand recovery.
Management guided to a first-half pre-tax profit of $1.2–1.3bn, significantly ahead of Ord Minnett’s $465m forecast and consensus of $450m before the update, with yields expected to remain high. FY23 earnings before interest and tax guidance for the loyalty business of $425–450m was reiterated, although there was no additional commentary on broader FY23 expectations – suffice to say it augurs for a strong start to the year.
Air travel demand remains strong with the domestic leisure and business segments tracking at 130% and 100% of pre-COVID levels, respectively. Despite this, domestic capacity was tempered to 94% and 100% of pre-COVID levels, versus our 93% and 107% estimates, allowing sufficient slack to enable operational metrics to improve (cancellation rates are less than 2% currently). The recovery in international travel has continued ahead of our expectations, with capacity set to 61% of pre-COVID levels in 1H23 and 77% in 2H23, versus our 63% and 83% forecasts before this update.
The airline’s strong operating results continue to drive improvement in the balance sheet. Management anticipates net debt of $3.2–3.4bn at 31 December, well below the $3.9bn target. We note this includes the impact of the $400m buyback, which is 26% completed.
We have rebased our earnings forecasts, resulting in a 17% lift in our operating earnings forecast in FY23, with changes of ±3% thereafter. Our target price has risen to $7.50 from $7.40 having factored in our earnings changes and incorporated a P/E-multiples-based relative valuation in setting our target price, in conjunction with our other approaches.
We are positive on Qantas given the prevailing rational domestic market in which it operates, its repaired balance sheet, continuing growth in the loyalty business and its focus on the cost base. Qantas is our key preference in the sector and we maintain our Buy recommendation.
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.