UBS says Qantas’ valuation is too compelling, upgrades stock to Buy

The market often treats positive news as an opportunity to get out as opposed to getting in – To some extent, that happened to Qantas (ASX: QAN) on Tuesday, with the stock finishing 2.2% lower from a session high of 0.8%.

Qantas intraday performance 23-24 May (Source: TradingView)

Fading a positive market update

The market update on Tuesday guided to $2,425 million to $2,475 million in FY23 underlying profit before tax compared to a $1.9 billion loss a year ago.

Notable takeaways from the market update include:

• Group Domestic capacity: “Will be above pre-COVID levels at 104% by the end of 2H23, led by a significant increase in flying on key routes between Melbourne, Sydney and Brisbane.”

• Group International capacity: “Will grow to greater than 80 per cent of pre-Covid levels by the end of 2H23, with the rate of increase slightly below plan due to some supply issues earlier in the half.”

• Travel trends: Indicate strong demand that’s expected to continue into FY24

• Revenue intakes: At 118 per cent of pre-Covid levels for Group Domestic and 123 per cent of Group International

• Fuel prices: “Remain elevated but recent falls will deliver a cost improvement in 2H23, which is partly offset by adverse movements in foreign exchange for an overall benefit of $150 million.”

• Qantas Loyalty: “Remains on track to reach the top end of its FY23 Underlying EBIT target of $425 million to $450 million.”

• Buy-back: The Board increased the existing on-market buy-back by up to $100 million. The current $500 million buy-back is 78% per cent complete with an average price of $6.49 per share.

• CEO comments: ““The industry remains capacity constrained and the travel category remains strong, so there’s still a mismatch between supply and demand that’s likely to persist for some time, especially for international flying.”

Favourable conditions continue

UBS says there are still risks around the company’s upcoming capex cycle and questions the strength of travel demand heading into 2024. However, at a current price-to-earnings of 6.1, “we think both effects are sufficiently priced in,” the broker said in a note on Wednesday.

The trading update also provided some clues about what FY24 might look like. These include:

• “Strong net debt guidance with unchanged capex guidance suggests stronger cash from forward bookings.”

• “Qantas expects fares to moderate from 1H23 but yields to remain 'materially higher' than pre-Covid through FY24.”

• “Capacity guidance, compared with previous guidance in Feb, has Group Domestic down 2% pt in 2H23 … and Group International down 2%pt in 2H23. We think the latter is more likely a reflection of supply constraints than a strategic decision based on weak demand signals.”

UBS upgraded the stock to a BUY from Neutral with a $7.95 target price.

Qantas 12-month price chart (Source: TradingView)