It’s been a fascinating start to the year for Australian market watchers. Let’s tick off the factors: concerns about sluggish growth in the Chinese economy, volatility amid declining oil and other commodity prices, a February rate cut which cited weakness in both European and Japanese economic growth and a drop off in the Australian CPI. All of this gave the Australian central bank significant room for dropping its overnight rate.
In this fast-changing environment, we thought we’d look at an Aussie equity likely to benefit. Qantas Airways Ltd. (QAN.AX) is an obvious beneficiary of lower oil prices. We covered it in January of last year, contrasting the stellar performance of the U.S. airline industry against the Flying Kangaroo, however an aggressive cost cutting program, coupled with the tailwind from the declining oil price have seen a sharp turnaround in the company’s fortunes.
Source: Thomson Reuters Eikon
Flying high on cheaper oil
Qantas’ share price has clearly rebounded with the recent fall in oil and shareholders will be hoping that recent share price gains can be consolidated based on continuing increases in the company’s operating efficiency. The company reported an underlying profit of A$367millionfor the December 2014 half year. According to Thomson Reuters Street Events, the CFO reported net passenger revenue up 2.6% and operating expenses excluding fuel were down by 3.5% in the half — but the elephant in the room was the $91 million reduction in the airline’s fuel bill.
Source: Thomson Reuters Eikon
Analysts’ darling
All of this has got sell side analysts excited, with Qantas’ ARM score (a measure of change in analyst sentiment) scoring a perfect 100. This means that analysts are (in aggregate) raising estimates across the income statement and raising recommendations. With the oil price appearing to have stabilized at these new, lower levels, all eyes will clearly be focused on the company’s transformation program as well as its admirable work in reducing leverage.
Source: Thomson Reuters Eikon
Judging expectations
The valuation chart below shows the higher EPS growth expected of many of the company’s Asian peers, but at a significantly higher multiple. The question is whether one prefers a higher growth threshold to make money – expectations for Qantas remain subdued while ANA and Singapore in particular look to have high shareholder expectations embedded in their current share price. While this is fine in some sectors, it seems fraught with risk in an industry as deeply cyclical as the airlines, and where the oil price, the industry’s biggest cost input, is bouncing around so unpredictably.
Source: Thomson Reuters Eikon
Generating lift
Overall, though, most factors seem to point to happy times for shareholders. The valuation remains undemanding – both on a fair value and P/E basis (the market is still implying negative 3.5% growth over the next five years) whereas StarMine’s own longer term smart growth forecasts suggest 12.3% over the same period. As long as the oil price remains subdued … the Flying Kangaroo may continue doing just that.
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