Qantas transformation program builds $200m buffer, analysts say

Qantas’s bumper result provided it with enough surplus cash to reinstate its long-absent dividend.

Analysts believe Qantas’s share price, which fell 2.6 per cent to $3.36 yesterday, is undervalued.

Qantas’s $2.1 billion transformation program has given the airline a $200 million buffer that will insulate it from single-digit revenue declines over the next 12 months, analysts say.

The nation’s dominant carrier revealed a record profit of $1.53bn this week as it banked the benefits of its cost-cutting program and lower fuel prices.

Qantas chief Alan Joyce attributed the turnaround to the airline’s focus on its transformation plan that made $557m worth of savings in the past 12 months.

Analysts at UBS believe those gains will help Qantas battle any headwinds against revenue growth and will provide it with a $200m buffer to protect profit for the next 12 months.

“The tailwind of cost cuts and a slightly lower fuel bill provide a $200m profit buffer into FY17, which should be sufficient to absorb a 6 per cent unit revenue decline in the December 16 half for International,” said UBS analyst Simon Mitchell.

Qantas’s bumper result provided it with enough surplus cash to reinstate its long-absent dividend, which analysts tipped could be increased as soon as next year.

“We assume the 7c final dividend will annualise to a 15c full-year dividend, which equates to a respectable 4.5 per cent yield,” Mr Mitchell said.

The airline will reward shareholders with a fully franked dividend of 7c a share, equalling $134m, on October 12 and will launch another share buyback ­totalling $366m.

Qantas said its preferred method of returning capital to shareholders in the future would come in the form of more dividends.

The buyback and the return of the dividend means Qantas has committed $1.5bn in capital returns to shareholders in the past 18 months.

Analysts believe Qantas’s share price, which fell 2.6 per cent to $3.36 yesterday, remains undervalued by the market.

Citi and JPMorgan upgraded their 12-month target price for the airline. “We have upgraded our net profit after tax by 0.8 per cent for FY17 and by 14.2 per cent for FY18 on the back of a likely better performance from Qantas International, lower fuel costs in FY18, and the benefits from the larger transformation program,” said JPMorgan analyst Guy Bunce.

“There’s no denying that the airline industry’s return on invested capital track record has been poor, leading to volatile returns for shareholders. However, in the case of Qantas, it’s hard to imagine a more ­favourable time to invest, in our view.

“Fuel costs are the lowest they’ve been in years, there’s a truce in the capacity wars, passenger demand is up, operating costs are being chipped away, and the ­financial health of the company looks relatively good compared to history and peers.”

Qantas will give its 25,000 employees, who have been subject to a wage freeze, a cash bonus of up to $3000 each.