You have to be more than a bit cynical about the rush to lift valuations of Qantas by broking and investment bank analysts who six months ago thought (bar probably one) that the airline was an ‘underperform’, a ‘sell’, or at best a ‘neutral hold’.
Many of the new valuations are above, well above in some cases, the effective $5.45 offer price in the failed bid from Airline Partners Australia. (Remember it was $5.60 a share until they discounted it for the 15c a share dividend.)
That offer, discredited as it is now, put a base under the Qantas share price, forcing all brokers to boost their valuations.
And yet many of the same brokers had valuations substantially less; around $3.90 to $4.20 in most cases, six months or more ago.
As soon as the bid materialised, a couple of analysts started boosting their valuations or their SOTP estimates (sum of the parts) which are another way injecting some blue sky into their model-based valuations with discounted cash flow analysis, comparisons to peers and overall market values.
They were, in their defence, reacting to the flow of information and sentiment emerging from Qantas, all of which was mostly chicken little, ‘the sky is falling’ doom and gloom stuff, or cost cuts, ‘take on the unions’ and basically negative.
There was very little positive news flow from the Qantas boardroom which became very apparent during the bid.
Now we are being deluged by ‘good news’ and investors had better keep an open mind and some scepticism because there’s going to be a lot of rosy-coloured commentary for a while.
Watch the way the Qantas share price reacts to oil prices if they firm and head towards $US80 a barrel.
If past performance is a guide, the Qantas share price should fall, but with the switch now firmly flicked to vaudeville, don’t bet on it.
For analysts, Qantas’ improvement in business showed up in the airline’s monthly releases but these were constantly downplayed by management, with warnings of unfair competition from Middle East carriers and the likes of new carriers, such as Tiger and anyone else with a spare 737 or Airbus A320 or 330.
Then the bid came, management threw its lot in with Airline Partners and the flow of information was cut off. The APA Bidder’s statement had some information but Target statement from Qantas had none of what we saw last week.
Then the poor folk at APA released the scare campaign when it was forced to cut the bid’s minimum acceptance condition to 70 per cent and warned shareholders the share price might fall because there would be $4 billion or so paid out in big dividends from asset sales and refinancings.
That obviously got the cleverer analysts working on what ifs and Goldman Sachs JB Were was one of the first to estimate Qantas management could realise $4 billion or so from asset sales; which if you think about it was a terrible indictment of the Qantas board’s Target Statement to its shareholders because there was simply no discernible defence after it rolled over and supported the APA bid.
Now, after the briefings by Qantas CEO, Geoff Dixon, last week there’s a great deal more information and better understood sentiment in the market.
A number of brokers now have a target price above the APA bid price: UBS ($5.90), JP Morgan ($5.78) and Merrill Lynch and Goldman Sachs JB Were both with $5.70. GSJBW also has a ‘sum of the parts’ valuation of $6.40 a share.
UBS said its “A$5.90 valuation is based on 12x our FY08 EPS forecast, which is in the middle of the current trading range of Qantas’ peers and at a 35% discount to the Australian Industrials. Our current price target does not take account of the additional A$1.10 in value highlighted in our previous report.”
GSJBW said it was “more confident in our $6.40 SOTP valuation from potential asset sales (minority stake in Frequent flyer Program in FY09/10) and improved disclosure (freight). The key risk remains greater than anticipated yield impact from competitor capacity growth in Domestic (CY08) and International (FY09). With earnings momentum strong for another 12-18 months & value realisation via capital management/non-airline assets yet to come, we maintain our BUY view.”
ABN Amro, meanwhile, upgraded its full-year profit forecast to $975 million but warned next financial year remained uncertain for the carrier. It has a $4.90 target price for Qantas.
Qantas touched an all-time high of $5.68 Friday morning trading, before closing at $5.66.
Since the market opened on Monday Qantas jumped a massive 44c when its price was widely tipped to fall. Even departing chairman, Margaret Jackson had that attitude.
Credit Suisse analysts Anthony Moulder and Mark Roberts were two of many analysts to upgrade their Qantas share price targets – to $6.32 from $5.45 – and adjusted the rating to “outperform” from “neutral”.
“We see the demand profile for Qantas, coupled with the shortage of capacity growth, as supporting increased levels of profitability for the next 12 months,” the analysts wrote in their research.
Besides their $5.90 valuation, UBS analysts Angela Frino and Simon Mitchell maintained a “buy 2” recommendation on Qantas.
JP Morgan’s analyst Matthew Crowe increased his valuation to $5.74 from $5.53, with an upgraded December share price target of $6.02.
Deutsche Bank’s Jason Bloom was not as optimistic, giving a target price of $5.05 and a hold recommendation because of expanding aviation capacity.
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With Qantas’ strong performance since its bid failed, what will be the reaction today from shareholders in APN News & Media after Friday’s meeting saw the $6.20 a share offer rejected?
The offer came from major shareholder, the O’Reilly family’s Independent News & Media, with two private equity partners, Carlyle and media specialists, Providence Equity Partners.
The offer failed w
