Qantas Airways Limited
Recommendation
The last time we reviewed Qantas, on 7 May 07 (Sell – $5.38), the company was in the final throes of its flirtation with private equity. The share price is up 3% since, although this price doesn’t account for the fully franked dividend of 15 cents.
Why did the takeover fail? Because the price offered was too low. What it did do, though, is produce a share price rerating, so long desired by Qantas management it was willing to take the company private to get it. Now it’s busy implementing the business plan of its suitors and so far, it seems to be working out very nicely indeed. The 2007 results delivered a 50% increase in net profit to a record $720m, prompting a share buyback for up to 10% of its issued shares.
With one of Australia’s best brands doing so well, you might be wondering why we’re still not keen. Same reason as ever; airlines have historically been a place where balance sheets go to die. In late 2005, for example, the company announced a fleet upgrade worth about $20bn – 26 times the company’s record 2007 profit. Of course, a business with poor economics can still produce good results. But we’re interested in profitability over an entire business cycle and certainly don’t want to be buying when times are good.
Any number of things could go wrong from here; Virgin Blue has another 20-odd planes about to be delivered and Tiger Airways will add more capacity to leisure routes; the oil price is an ever present threat, as is another terrorist attack; Emirates and other middle eastern carriers are making massive orders for new aircraft, many of which will find their way here, and an economic slowdown could wipe out the profitability of business class yields at the pointy end of the plane. There are many more reasons to be worried about the future plight of this business than to be comfortable with it.
Now that the takeover has failed we’re reinstating our previous recommendation of AVOID.