UBS sees Qantas shares making a return to pre-covid valuations

Qantas (ASX: QAN) shares have seen three major rallies since August, triggered by its full-year results, an October trading update and another trading update on Wednesday.

The stock is up almost 40% since August and now only 20% away from its pre-covid high of $7.40.

"Qantas is more resilient now than previously, with a lower cost base, better domestic market structure, lower gearing, more flexible aircraft orders, and greater contribution from Loyalty," UBS analyst said in a note on Thursday.

The investment bank reaffirmed a 12-month target price of $7.20 per share with a Buy rating.

Trading update: Key items

UBS' key takeaways from Wednesday's trading update.

• The new profit before tax guidance of $1.35bn to $1.45bn was $150m above the company's previous guidance and $200m higher than UBS estimates of $1.2bn

• Year-end guidance for net debt was $900m lower to $2.3bn to $2.5bn and well-below UBS estimates of $3.37bn

• Fuel expense was forecast to be $5bn and consistent with prior guidances. UBS believes this 'comprises a higher unit cost and lower volume consistent with capacity updates'

• Outstanding covid credits fell $500m since June end to $800m, which UBS views as making net debt guidance 'even stronger'

Capital management: More to come

Qantas said its $400m share buyback was 76% complete, adding that low levels of net debt places the company in a position to consider future shareholder returns.

"We already expect extra buybacks to be announced in the near term (i.e. existing $400m in 1H23 plus UBSe $300m in 2H23 and $500m in FY24)," the analysts said.

"We think Qantas is more likely to use on-market buybacks to return capital until the post-Covid trading conditions stabilise and the airline re-enters a tax-paying position that would allow franking of distributions."

Recurring price action

The three earnings-related announcements have all triggered pretty similar share price reactions, including:

• 25 Aug: +5.95%

• 13 Oct: +8.70%

• 23 Nov: +5.3%

Of note, Qantas shares rallied around 7-10% the days following the August and October announcements. The positive broker notes that follow the day(s) after the earnings updates may have attributed to the sustained buying of Qantas shares.

Qantas share price chart (Source: TradingView)