Qantas (QAN) is currently trading at a discount relative to its US peers. We make a case that QAN should be trading at a premium, based on factors including post-pandemic airline industry dynamics, overly conservative earnings estimates for the company, and upside potential to the share price with a possible rerate and further earnings upgrades.
We have held QAN in the Focus Portfolio to provide leverage to the travel reopening that we have seen globally over the past 12 months.
QAN has performed strongly over the past 6-7 months, with gains of around 50% since the June 22 lows. Despite this, we still believe that QAN presents a well-priced investment opportunity due to its current discounted valuation relative to US peers, while earnings still have the potential to surprise to the upside.
Ticker | Company | EV/EBITDA |
|
CY2023 |
CY2024 |
||
QAN.AX | Qantas Airways Ltd | 3.3 | 3.2 |
AAL.O | American Airlines Group Inc | 7.1 | 6 |
DAL | Delta Air Lines Inc | 5.1 | 4.5 |
UAL.O | United Airlines Holdings Inc | 4.2 | 3.7 |
LUV | Southwest Airlines Co | 4.1 | 3.4 |
US Peer Average | 5.1 | 4.4 | |
QAN discount | -36% | -28% |
Source: Refinitiv, Wilsons.
The discount may be partially explained by the view that US airlines will continue to recover and grow earnings after CY23. In contrast, consensus expects QAN to effectively reach its earnings peak by FY23. However, when looking at the company's valuation metrics in CY2024 - after the global travel recovery is expected to be largely complete - the discount on QAN's stock price still persists and seems unjustified, in our view.
Qantas and the Australian air travel industry have undergone structural change since the pandemic. We think the discount is illogical given:
Based on these factors, QAN should command a premium over its US peers rather than a discount, especially considering the US airline industry is highly competitive, and the large US airlines will operate on considerably lower ROICs than QAN.
QAN earnings are forecast to grow at 2.6% in FY24. This estimate looks too conservative, in our view. We do not believe earnings have peaked, contrary to consensus, and see upside to current earnings estimates for FY23 and FY24. This view is based on:
As figure 6 shows, putting QAN’s consensus EBITDA (earnings before interest, taxes, depreciation and amortization) for FY24 on a multiple of 4.0x (vs the FY24 US peer average at 4.4x) implies a valuation of $8.57 per share – or ~31% upside to QAN’s current share price.
Alternatively, if we are more conservative and assume QAN should be valued at 3.5x consensus FY24 EBITDA – still well below its 10-year pre-pandemic multiple of 3.7x – it implies a fair value of $7.34 – or ~12% upside.
On top of this, we believe current consensus forecasts for QAN’s earnings in FY23-FY25 are still too conservative, and that more upgrades are plausible over the next 12 months, which would translate to additional valuation upside.
Therefore, using reasonable assumptions we continue to see material upside to QAN’s share price, given the potential for its multiple to re-rate closer to peers and considering the likelihood of further earnings revisions.
As cyclical businesses, airlines are inherently exposed to the ebbs and flows of the economic cycle.
Therefore, the key threat facing QAN at this juncture is that an economic slowdown or recession, coupled with ongoing cost of living pressures, could see households curtail their expenditure on non-discretionary items like travel.
However, notwithstanding the cyclical risks, we remain constructive on QAN given:
Rob is an experienced research analyst with a background in both equity strategy and macroeconomics. He has a strong knowledge of equity strategy, asset allocation, and financial and econometric modelling.
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