How much is Qantas worth? Depends who you ask

One fund manager expects the airline’s share price to more than double as travel recovers. Others are far less bullish.

While new planes always excite, L1 Capital believes that it is Qantas’s diversification through the loyalty business that will allow it to trade at a premium. Picture: Steve Pohlner

Twelve months ago, a dozen Qantas A380s were awaiting their fate in the Mojave Desert storage lot known by locals as the boneyard.

Now only six superjumbos – two destined for spare parts – are left in the sand as Australia’s biggest carrier scrambles to find people and planes to help carry out a remarkably fast turnaround from near death to profitable airline.

So quick is its pivot that top stock picker Mark Landau – from L1 Capital – believes Qantas’s share price is set to surge. “I think the shares could double over the next couple years if management can achieve their (financial year 2024) targets,” says Landau.

There has certainly been a dramatic rerating for the airline just coming out of survival mode.

Most major analysts are now overweight or have a buy rating on Qantas – meaning they believe its shares should be worth more than they are currently trading at.

Just how high Qantas shares may go depends on who is asked. All seem to feel the only way is up.

Landau’s prediction puts Qantas shares at about $11 over two years, while 12-month predictions from investment bank equity analysts range from $7.10 a share at Morgan Stanley, $6.90 at Barrenjoey, $6.40 at JPMorgan, and $6.30 at Jarden. Qantas shares closed at $5.31 on Wednesday.

The airline’s single largest shareholder, Northcape Capital, is impressed with its turnaround.

“We think investors will be surprised by how quickly profits rebound and think there is good upside in the stock,” says Richard Maynier, a portfolio manager at Northscape, which has $12bn in funds under management. “Qantas has done a good job of navigating the challenges of the last few years and emerged from the downturn in better shape.”

Earlier this month, Qantas chief executive Alan Joyce said the carrier had flown through the worst of the crisis and was once more set for profitability, after travel surged above pre-pandemic levels in April, revealing flaws and weaknesses across the sector.

At its May financial update, Joyce predicted underlying earnings in the six months to June 30 would land between $450m and $550m, ahead of analysts’ estimates of about $200m. Debt had fallen by a further $1bn since the end of December to hit $4.5bn.

The airline has ordered 12 Airbus A350-1000 jets and plans to use them to fly non-stop from Sydney to London and Sydney to New York by the end of 2025.

While new planes always excite, L1’s Landau believes that it is Qantas’s diversification through the loyalty business that gives it the stripes to trade at a premium to where it has traded in the past.

“Over the past decade, Qantas has traded at a 40 per cent discount to the ASX Industrials Index. I believe that discount deserves to be smaller today, given Qantas is a better business than it was five or 10 years ago,” he says.

“It generates a higher return on capital, better cashflow conversion and it generates a much larger proportion of its earnings from its high-growth loyalty division, which warrants a far higher multiple than a traditional airline.”

Barrenjoey Capital Partners analyst Matt Ryan told clients that it was promising to see Qantas move from balance sheet repair to confirmation of demand and competition. He now believes the next key step will be shareholder distributions and growth.

“Qantas has now moved past balance sheet repair and is investing for growth,” Ryan wrote.

“With business momentum tracking ahead of expectations and plenty of valuation upside, we continue to see upside in the shares.”

The lowest price expectation is from Jarden – which still rates Qantas a buy, but has a more tempered view on the headline-grabbing Project Sunrise fleet order, citing the “considerable uncertainty remaining on the financial details and start-up costs”.

Qantas is yet to give details on how it will fund the acquisition of the new aircraft, which have a list price of $US335m ($480m) each.

Morningstar, which does not give price estimates, believes current fair value for the shares is $5.70, a premium to the most recent close. But analyst Angus ­Hewitt tells The Australian there is still uncertainty around the return of key international markets.

“We expect the border opening in February to drive a strong recovery in international flying in the second half, but anticipate foreign borders will prove a near-term headwind for Qantas, and we estimate around a third of Qantas’s pre-Covid international capacity comes from countries with more protracted reopening plans, such as China,” he says.

While Qantas publicly gears itself up for growth, Virgin Australia is working through a restructure following its sale to Bain Capital by the airline’s administrators.

The airline is currently besieged by claims of bullying and signs of discontent among frontline workers. As it is no longer listed on the ASX, it hasn’t provided a trading update.

Virgin has also been slow to reveal its post-takeover international strategy. The airline currently offers Bali and Fiji as destinations and on Tuesday announced it could offer US flights once more, through a codeshare with United Airlines that will begin in two weeks. It also announced a new tie-up with Qatar later this year.

Qantas’s strength in the face of adversity and ability to profit on the weaknesses of rivals is due in no small part to ruthlessness at top. Joyce used his political nous to help lobby for government support during the pandemic. The airline received about $2bn – of which half was paid directly to workers who had been stood down. The government also subsidised about 800,000 half-price airfares so Australians who were not allowed to leave the country would support the domestic travel industry.

Joyce also used this time to introduce a major cost-cutting program, targeting $1bn from 2020 to 2023, much of which came in the form of job losses.

If that all seems a little too clever, it’s because it may well have been. At Easter, as business people and families queued at airports for hours, Joyce blamed frustrated passengers for not being “match fit”. So far, those issues have not dulled Qantas’s share price.