A smaller boost to Qantas (QAN) shares yesterday as the glow from the upbeat investor day briefing on Tuesday faded somewhat.
The shares rose half a per cent to end at $3.58 after the 24c a share surge the day before on the upgrading of the outlook, profit and suggestions of a resumption of dividends after a seven year drought, or other possible capital measures.
A string of investment analysts and shareholders issued glowing upgrades – a big about turn from a year ago or less when Qantas wasn’t flavour of the month.
But it now is thanks to the combined impact of lower fuel prices and the benefits of the restructuring program (which may have gone too far with the airline forced to start rehiring domestic and international staff after cutting thousands of jobs on the past year).
It’s a message that came from quarterly results from two big US airlines overnight – Delta and Southwest – both reported higher earnings, lifted dividend (or restarted them) and started buyback programs.
Other airlines in Asia and Europe (such as IAG, which owns BA) have reported strong rebound in revenue and earnings, thanks to the lower oil price, cost cutting and signs of an upturn in travel.
Analysts at JPMorgan upgraded Qantas Airways to “overweight” from “neutral” following investor day briefing which turned out to be much more upbeat than anyone had predicted – even the best informed analysts seem to have been surprised.
“We believe QAN is on the right track to improve profitability in the medium term, and we are confident that the quantum of cost savings can be achieved,” JPMorgan analysts told clients in a note yesterday.
UBS analysts said Qantas’ rapid debt repayments supported the case for capital management in the 2015-16 financial year (a common theme among the string of reports from analysts yesterday.
Qantas said it expects to reach targeted credit metrics two years earlier than previously forecast, including cutting debt by a billion dollars faster than expected, although it could now refinance its debt at much lower interest rates and get knocked down in the rush because of the enthusiasm for the stock.
"In our view this rapid degearing paves the way for capital management, which we expect to be announced later this year. Our forecasts already incorporate $0.5bn pa of shareholder payments from FY16+, which we expect to initially be in the form of buybacks given the lack of franking and the likely accretion,” UBS predicted.
Deutsche Bank analysts questioned whether Qantas would implement dividends or any other capital management for shareholders in the near term.
"The company believes that it will remain free cash flow positive for the foreseeable future however we believe that the company will need to retain firepower to fund increased capex on new international aircraft in FY17 onwards particularly to develop more point to point services into Asia.
"Therefore we believe that any resumption of dividends will be small."
And one fund manager recently warned that all of this and more is already factored into Qantas’s now lofty share price.
“We believe management have done an excellent job managing the tough conditions of past years and short term earnings will undoubtedly be exceptionally strong," said Schroders in a note.
