MARKETS SPECTATOR: Flying kangaroo bounce?

The Qantas buyback has led to renewed market confidence, with Morgan Stanley speculating that a recovery is on the way for the flying kangaroo.

After years and years of relentless headwinds, Qantas is finally starting to receive some credit from the investment community, although it’s worth noting it is by no means out of the woods yet.

In a research note from Morgan Stanley, the broker has resumed coverage of the iconic Australian airline with an overweight (buy) rating. The broker believes there is early evidence of a moderation in domestic capacity and a continued turnaround in international operations should provide a solid foundation for future earnings recovery and capital management.

"In just five months, speculation of an equity raising (The Australian, June 12) has materialised into a buyback. Qantas today announced an accelerated debt reduction of around $1 billion in fiscal 2013, a further reduction in capital expenditure of approximately $100 million, and an on-market buyback of $100 million”.

Whilst the buyback only represents around 4 per cent of shares on issue, it delivers a confident message to the market, signalling balance sheet strength, capital expenditure flexibility and confidence in its future prospects.

Morgan Stanley believes that although the fist half 2013 guidance confirms further yield erosion, this risk is known and priced in to the market.

Looking ahead, the broker believes the risk/reward view is weighted towards the upside. It believes the valuation remains attractive at around 0.5 times the fiscal 12 book value and approximately seven times the estimated PE for 2014.

"All divisions except Qantas International continue to grow strongly, with Qantas Frequent Flyers continuing to gain traction, and Jetstar growing rapidly in Asia. Qantas remains strongly positioned to mount capacity challenges leveraging both Jetstar and Qantas while more than $350 million of savings expected over fiscal 2012-2014, which should turn Qantas mainline International back towards profitability,” the broker said.

Subsequently, Morgan Stanley has a price target of $1.88, more than 40 per cent above current levels. In fact, under its most bullish scenario, the broker sees the stock moving towards the $2.50 level.

image

Source: Morgan Stanley

Related Articles