Qantas provided FY23 guidance that merely confirms the big recovery in earnings post-COVID. Of more concern to the market now, is the impending revitalisation of the fleet which will be a multi-year project. QAN will hold an Investor Day on 30 May to explain.
The FY23 result is virtually in the bag. FY23 profit before tax will be between $2,425m and $2,475m as domestic capacity will be slightly above pre-COVID levels (104%) but international still lagging at 80% as at 30 June this year. Forward bookings remain very healthy as QAN reintroduces routes and reinvigorates its schedule. QAN has begun reallocating its ‘buffer’ capacity (aircraft and staff) back to normal operational capacity which will generate revenue rather than standby costs (approx. $200m).
Group net debt will be between $2.7-2.9bn at 30 June, well below the target range of $3.7-4.6bn. QAN upped its current $500m buyback by a further $100m. The buyback is currently 78% complete at an average price of $6.49 per share.
Capex for FY23 will land between $2.7-2.9bn but the real interest is now directed towards how the company will plan and time the capex over the next few years for its Project Sunrise and Winton programs. These are the respective international and domestic fleet renewal programs that will not only bring the fleet up to date but will meaningfully lower group operating costs, particularly through better fuel efficiency.
Jet fuel prices have been declining in 2H23, offset by an adverse change in the AUD:USD. The net effect is a $150m benefit to QAN for FY23. The company’s $4.8bn FY23 fuel bill forecast is based on an oil price of US$97/bbl (Brent) and an AUD:USD of 0.69.
QAN expects its Qantas Loyalty division to deliver underlying EBIT between $425-450m.
Investment View
With an undergeared balance sheet and presently strong operational cashflow, QAN can be confident that the extensive capex program can be accommodated. Domestic travel is back to normal but there is still a leg to go before international travel reaches and surpasses pre-COVID levels.
But the market is now pre-occupied with how QAN plans to manage its large capex program for the renewal of its fleet. Project Winton and Project Sunrise were announced last year so the scale of the task is already understood.
The key question to be answered at next week’s briefing will be the timing and quantum of the capex over the next few years. With the total capex bill likely to be potentially more than $12bn over FY24-28f, the market will need to believe that operating cashflow will be sufficiently robust to carry the capex burden. In QAN’s favour is the exceptionally strong balance sheet position it will report at 30 June 2023. Consensus capex forecasts currently only amount to approximately $9bn over the next three years which looks light, in our view.
Project Winton is the domestic fleet replacement program including Jetstar. It consists of 40 orders plus purchase rights to another 94 aircraft over a 10-year period.
Project Sunrise is the international fleet program with the first of 12x A350-1000 aircraft expected to be in operation at the end of 2025.
The current fleet of 311 aircraft has an average age of 14.7 years which is not old by international standards. The renewal program will substantially tilt the fleet towards Airbus aircraft as the older Boeing aircraft are retired and are replaced by Airbus kit.
The share price reaction to the update was strangely ambivalent which suggests that the profit upgrade cycle is beginning to wear thin. The market has a wide range of earnings forecasts and valuations which also demonstrates the broad views about where aviation is heading in the next few years. The potential re-listing of Virgin Australia will be a distraction for some investors in the near term, but it will be broadly priced against QAN as the benchmark.
Our view is that much of the recovery news is now in the share price and that the market is fretting over the capex bill. For this reason, we are lowering our recommendation to Hold from Buy until a clear understanding of the capex program and its financial implications can be absorbed. Our longer term view of the stock is that there is substantial value to be earned from a more normal global aviation market.
At <7x FY24f consensus EPS, QAN is not expensive but is in line with its long-term average. Its nearest international competitor, Singapore Airlines is trading on a PE ratio of 10.6x FY24f EPS.
Risks to Investment View
Global air traffic recovery may be affected by the potential for recession in various regions and the slow return of China to world markets. The Russia/Ukraine conflict is restricting global air traffic routes and may continue to do so. High fuel prices may persist, and this could affect profitability of airlines.
Recommendation
We have lowered our recommendation to Hold.
