Analysis of QANTAS
Abstract
The purpose of this report is to valuate the share of Qantas (ASX code: QAN) using
top-down fundamental analysis. The first step of this valuation is to analyze the
macroeconomic factors which affect share prices. The second step is to evaluate the
domestic airline industry in terms of its performance and competitive forces. As the
final step, a detailed analysis of the company’s strategies and financial health is
undertaken. On the basis of the estimated intrinsic value of the share, a
recommendation of trading in this stock is provided.
Table of Content
List of Figures ...................................................................................................................................1
List of Tables .....................................................................................................................................2
1. Macroeconomic Analysis .............................................................................................................1
1.1 International Economy ........................................................................................................4
1.1.1 GDP ...........................................................................................................................4
1.1.2 Major Government Bond Yield and Interest Rate Analysis .......................................8
1.2 Australian Economy .......................................................................................................... 11
1.2.1 Australian GDP ........................................................................................................ 11
1.2.2 Unemployment rate ................................................................................................ 11
1.2.3 Interest rate and government bond........................................................................12
1.3 Stock Market .....................................................................................................................14
1.4 Oil price .............................................................................................................................15
2. Industry ......................................................................................................................................16
2.1 Qualitative Analysis - Porter’s Competitive Forces ...........................................................16
2.1.1 Threat of New Entrants ...........................................................................................16
2.1.2 Bargaining Power of Buyers ....................................................................................16
2.1.3 Rivalry between Existing Competitors ....................................................................16
2.1.4 Threat of Substitute Products or Services ...............................................................17
2.1.5 Bargaining Power of Supplier ..................................................................................19
2.2 Quantitative Analysis and Forecasts .................................................................................19
3. Company Analysis ......................................................................................................................21
3.1 Company profile ................................................................................................................21
3.2 Company strategies ...........................................................................................................21
3.3 Swot Analysis.....................................................................................................................22
3.4 Ratio Analysis ....................................................................................................................23
3.4.1 Liquidity Ratio .........................................................................................................23
3.4.2 Risk Analysis Ratio ...................................................................................................24
3.4.3 Efficiency Ratio ........................................................................................................24
3.4.4 Profitability Ratio ....................................................................................................25
3.4.4 Du Pont Analysis......................................................................................................26
3.5 Valuation ...........................................................................................................................27
3.5.1 Free Cash Flow Model .............................................................................................27
3.5.1.1 Assumption of inputes into the model ................................................................27
3.5.2 Earnings Multiplier Approach .................................................................................32
3.5.3 Summary of valuations ...........................................................................................34
4. Recommendation .......................................................................................................................35
List of Figures
FIGURE 1.1 - GLOBAL GDP GROWTH ................................................................................................. 4
FIGURE 1.2 - UNITED STATES GDP GROWTH RATE .......................................................................... 5
FIGURE 1.3 - EURO AREA GDP GROWTH RATE ................................................................................ 5
FIGURE 1.4 - CHINA GDP GROWTH RATE ........................................................................................ 5
FIGURE 1.5 - CONTRIBUTION TO GLOBE GDP GROWTH ................................................................... 6
FIGURE 1.6 - G4 “ALL-SECTOR” PMI OUTPUT INDEX ...................................................................... 6
FIGURE 1.7 - BRIC “ALL-SECTOR” PMI OUTPUT INDEX .................................................................. 6
FIGURE 1.8 - US GDP AND PMI SPREADS ........................................................................................ 7
FIGURE 1.9 - EUROZONE GDP AND PMI SPREADS ........................................................................... 7
FIGURE 1.10 - CHINA GDP AND PMI SPREADS ................................................................................ 7
FIGURE 1.11 - BRITISH POUND LIBOR RATE ............................. ERROR! BOOKMARK NOT DEFINED.
FIGURE 1.12 - UNITED STATE DOLLAR LIBOR RATE ......................................................................... 8
FIGURE 1.13 - DOLLAR LIBOR AND OIS SPREAD.............................................................................. 9
FIGURE 1.14 - UNITED KINGDOM GOVERNMENT BOND YIELD ........................................................ 9
FIGURE 1.15 - UNITED STATES GOVERNMENT BOND YIELD ............................................................. 9
FIGURE 1.16 - UNITED KINGDOM INTEREST RATE.......................................................................... 10
FIGURE 1.17 - UNITED STATES INTEREST RATE ........................ ERROR! BOOKMARK NOT DEFINED.
FIGURE 1.18 - AUSTRALIA GDP GROWTH RATE....................... ERROR! BOOKMARK NOT DEFINED.
FIGURE 1.19 - AUSTRALIA UNEMPLOYMENT RATE................... ERROR! BOOKMARK NOT DEFINED.
FIGURE 1.20 - AUSTRALIA INTEREST RATE .............................. ERROR! BOOKMARK NOT DEFINED.
FIGURE 1.21 - AUSTRALIA GOVERNMENT BOND YIELD ........... ERROR! BOOKMARK NOT DEFINED.
1
FIGURE 1.22 - AUSTRALIA INFLATION RATE ............................. ERROR! BOOKMARK NOT DEFINED.
FIGURE 1.23 - THE GLOBE DOW .............................................. ERROR! BOOKMARK NOT DEFINED.
FIGURE 1.24 - DOW JONES COMPOSITE AVERAGE .................... ERROR! BOOKMARK NOT DEFINED.
FIGURE 1.25 - DOW JONES INDUSTRIAL AVERAGE ................... ERROR! BOOKMARK NOT DEFINED.
FIGURE 1.26 - FTSE 100 .......................................................... ERROR! BOOKMARK NOT DEFINED.
FIGURE 1.27 - ASX 200 ........................................................... ERROR! BOOKMARK NOT DEFINED.
FIGURE 1.28 - CRUDE OIL (PETROLEUM) MONTHLY PRICE ...... ERROR! BOOKMARK NOT DEFINED.
FIGURE 2.1 – DOMESTIC AIR FARES (BUSINESS) ...................... ERROR! BOOKMARK NOT DEFINED.
FIGURE 2.2 – DOMESTIC AIR FARES (ECONOMY) ..................... ERROR! BOOKMARK NOT DEFINED.
FIGURE 2.3 – DOMESTIC AIR FARES (RESTRICTED ECONOMY) ERROR! BOOKMARK NOT DEFINED.
FIGURE 2.4 – REVENUES OF DIFFERENT INDUSTRIES ................ ERROR! BOOKMARK NOT DEFINED.
FIGURE 2.5 – DOMESTIC AIR FARE INDEX ................................ ERROR! BOOKMARK NOT DEFINED.
FIGURE 2.6 - FORECASTS: AIR PASSENGER MOVEMENTS .......... ERROR! BOOKMARK NOT DEFINED.
FIGURE 3.2: LIQUIDITY RATIOS OF QANTAS FROM 2005 TO 2010 ................................................... 23
FIGURE 3.3: D/E RATIOS OF QANTAS FROM 2005 TO 2010.............................................................. 24
FIGURE 3.5: PROFITABILITY RATIOS OF QANTAS FROM 2005 TO 2010 ............................................ 25
FIGURE 3.13: P/E RATIO OF QANTAS FROM 2001 TO 2010 .............................................................. 32
FIGURE 3.14: EPS OF QANTAS FROM 2001 TO 2010 ....................................................................... 33
List of Tables
TABLE 2.7 – AUSTRALIA AIRLINE INDUSTRY HISTORICAL REVENUE ............................................... 20
TABLE 2.8 - AUSTRALIA AIRLINE INDUSTRY PROJECTED REVENUE................................................. 20
TABLE 3.1: SWOT ANALYSIS ........................................................................................................... 22
TABLE 3.2: LIQUIDITY RATIOS OF QANTAS (2005-2010) ................................................................ 23
TABLE 3.3: RISK ANALYSIS RATIOS OF QANTAS (2005-2010) ......................................................... 23
TABLE 3.4: EFFICIENCY RATIOS OF QANTAS (2005-2010) .............................................................. 24
TABLE 3.5: PROFITABILITY RATIOS OF QANTAS (2005-2010) ......................................................... 25
TABLE 3.6: DU PONT ANALYSIS ...................................................................................................... 26
TABLE 3.7: FORECAST NCC ........................................................................................................... 28
TABLE 3.8: FORECAST NET BORROW ............................................................................................. 28
TABLE 3.9: FORECAST NET DEBT REPAYMENT............................................................................... 28
TABLE 3.10: FORECAST WORKING CAPITAL........................... 2ERROR! BOOKMARK NOT DEFINED.
TABLE 3.11: FORECAST CAPITAL EXPENDITURE..................... 2ERROR! BOOKMARK NOT DEFINED.
TABLE 3.12: VALUATION VIA FCF MODEL ...................................................................................... 31
TABLE 3.13: P/E RATIO OF QANTAS FROM 2001 TO 2010 ............................................................... 32
2
TABLE 3.14: EPS OF QANTAS FROM 2001 TO 2010 ........................................................................ 33
TABLE 3.15: SUMMARY OF SHARE PRICE VALUATIONS .................................................................... 34
3
1. Macroeconomic Analysis
Globalization has marched on rapidly in last decade which has made the world
economy more homogenized and integrated. Any domestic company, including
QANTAS, always fails to escape from the impact of global economic condition.
Therefore, a macro-level analysis of all the economies plays a vital role in evaluating
the economic atmosphere and figuring out the rational investment tactics for
investors.
1.1 International Economy
1.1.1 GDP
The global economy seems to resume after the hit of global financial crisis in 2008.
World growth is predicted to grow about 4.5% in 2010 and 4.25% in 2011.
Figure 1.1 - Global GDP Growth
According to figure 1.1, the global economy experienced a significant growth in the
end of 2008, followed by favorable moment from the beginning of 2009. This trend is
similar among the advanced as well as developing economies; while there are still
fundamental differences between them.
The advanced economies like USA and Euro area, are keeping a positive GDP growth.
Although the GDP growth rate of USA encountered a slightly decline in 2010, the
annual rate still keeps growing positively (Figure 1.2). Euro area witnesses an
increase in GDP rate which is trying to go beyond 1% in the end of 2010 (Figure 1.3).
Meanwhile, IMF forecasts that GDP growth rates of USA and Euro area are 3.25%
and 1% respectively (Fernando 2010).
4
Figure 1.2 – United States GDP Growth Rate
Figure 1.3 – Euro Area GDP Growth Rate
On the other hand, the emerging economies, such as China (Figure 1.5), who made
main contributions to the global economic recovery, is driving the growth in
investment and global demand. According to Figure 1.4, the GDP of China increased
sharply from 6% in early 2009 to approximate 12% in early 2010, followed by a
slightly decrease. The growth rate will be 9.9% in 2011 based on the forecast of IMF
(China Economic Review, 2010).
Figure 1.4 – China GDP Growth Rate
5
Figure 1.5 - Contribution to Globe GDP Growth
In addition to GDP, PMI is also a useful indicator of the future global economy,
providing a reliable guide to estimate future GDP. According to Figure 1.6 and Figure
1.7, the PMIs of both the advanced and emerging economies indicate that the global
economy is easing in recovery. PMI of USA declined in the beginning of 2010, but
compared to the sharp increase in 2009, this slight decrease may fail to change the
increasing trend (Figure1.8). PMI of Euro area has been keeping a favorable growth
rate, which rebound from negative 2.9% in the beginning of 2009 (Figure 1.9).
Furthermore, the apparent upward trend of PMI in China (Figure 1.10) supports the
prediction of future GDP growth in China, which is a positive sign for the global
economy recovery.
Figure 1.6 - G4 “all-sector” PMI Output Index
Figure 1.7 - BRIC “all-sector” PMI Output Index
6
Figure 1.8 - US GDP and PMI Spreads
Figure 1.9 - Eurozone GDP and PMI Spreads
Figure 1.10 - China GDP and PMI Spreads
7
1.1.2 Major Government Bond Yield and Interest Rate Analysis
After the hit of financial crisis, central banks responded by cutting the interest rate
sharply to stimulate the economy.
Figure 1.11 – British Pound Libor Rate
Figure 1.12 – United State Dollar Libor Rate
According to Figure 1.11 and Figure 1.12, both the three month British Pound LIBOR
Rate and United State Dollar LIBOR Rate were relatively high before January 2008.
Since the third quarter of 2008, the two rates experienced a massive decrease. They
dropped to 0.73 percent and 0.37 percent respectively in September 2010. It indicates
that the cost of borrowing unsecured funds between banks is lower recently and the
liquidity of banks has increased.
8
Figure 1.13 – Dollar Libor and OIS Spread
Dollar LIBOR and OIS SPEARD is a measure of how likely borrowing banks will
default. As shown in figure 1.13, the indicators have a similar trend as the rates shown
in figure 1.11 and 1.12, which implies that the credit market is more stable and the
credit worthy of banks in United State is higher than before.
Figure 1.14 – United Kingdom Government Bond Yield
Figure 1.15 – United States Government Bond Yield
Based on Figure 1.14, the Government Bond Yield for 10-year notes in U.K declined
66 basis points during the last 12 months to 3.23 percent in Aug 2010. It is higher than
the record low point in March 2009 at 2.95 percent. Figure 1.15 suggests that
Government Bond Yield for 10-year notes in U.S declined 92 basis points during the
9
last 12 months to 2.82 percent in Aug 2010. The decline shows that the inflation rate
is expected to decrease in the long term and so is the default risk of government.
Figure 1.16 – United Kingdom Interest Rate
Figure 1.17 – United States Interest Rate
The benchmark interest rate was reported at a record low of 0.50 percent since March
2009 which can be seen from figure 1.16. The low interest rate suggests that the Bank
of England remains a low benchmark in its purpose to keep on stimulating the
economy. Similarly, the latest benchmark interest rate in U.S., represented in Figure
1.17, was at its record low of 0.25 percent since December 2008, which implies the
US Federal Reserve also employed a low interest rate policy to aid the economy
recovery. The US Federal Reserve was claimed to proceeds from its mortgage bonds
into longer-term government debt in an effort to support their economy (FOMC
Statement).
The generally low interest rate signals that banks are offering a constant economy
stimulus plan to support the credit market and the economic growth.
10
1.2 Australian Economy
1.2.1 Australian GDP
The GDP in Australia is estimated bottomed out from the global financial crisis and is
expanded at an annual rate of 1.20 percent in the last reported quarter (Figure 1.18).
Australian economy is strongly dependent on its export of abundance of agriculture
and its mineral resource. Since its largest trading partner, China, whose economy is
constantly growing at a high rate, remains an intense demand for iron ore, the
Australia economy may keep on stoking by this demand. Therefore, Australian
economy is assessed to be at the upward sector of business cycle and will maintain its
fast growth rate.
Figure 1.18 - Australia GDP Growth Rate
1.2.2 Unemployment rate
According to Figure 1.19, the unemployment rate witnessed a dramatic increase
started from the end of 2008 and hit a five-year high of 5.7 in March of 2009 due to
the wide impact of the global recession. This number was higher than Government’s
previous forecast. From this point onward, the unemployment rate has gradually
declined to 5.1 in August 2010 (refer Australian Bureau of Statistics). This downward
trend is consistent with the growth trend in GDP. Thus, the unemployment rate may
follow this downward trend, as the GDP growth is estimated to be sustainable.
Figure 1.19 – Australia Unemployment Rate
11
1.2.3 Interest rate and government bond
As can be seen from Figure 1.20, the benchmark interest in Australia dropped vastly
from 7.25 to 3.8 at the beginning of 2009 in an attempt to stimulate the domestic
economy. However, while other major economies like US and UK continue to
promote their economies by keeping their average interest rate record low, Australian
central bank raised the average interest rate to the latest 4.5 percent. Australia was the
first country to raise its cash rate during the financial crisis and it is probably out of
the concern that the global economic recovery may falter trumped evidence of an
accelerating expansion at home (Reserve Bank of Australia 2010).
Figure 1.20 – Australia Interest Rate
Followed by the increase in interest rate, it is reasonable to find out that the inflation
rate in Australia increased as well (Figure 1.22). Hence it is expected that the inflation
rate will be controlled by holding a moderate level of interest rate. On the other hand,
the long term yield government bond decreased to 5.11 percent lately, which fits the
control of the inflation rate discussed above. Therefore, as the 10-year government
bond yield is taken as risk free rate, it is important to estimate that the yield of long
term government bond will remain stable at the latest level due to government’s effort
to control inflation rate (Figure 1.21).
Figure 1.21 – Australia Government Bond Yield
12
Figure 1.22 – Australia Inflation Rate
13
1.3 Stock Market
The global stock market seems to recover in the early 2009 after the global financial
crisis in 2008. Dow Jones, FTSE 100 and ASX 200 have fairly similar increasing
trends from early 2009 (Figure 1.23 to Figure 1.27). Investors seem to have regained
their confidences in the market after encountering the stock market crash in 2008. As
stock market index is generally acknowledged as a leading indicator of economy, it
implies that the global as well as Australian economy is on the road of recovering.
Figure 1.23 - The Globe Dow
Figure 1.24 - Dow Jones Composite Average
Figure 1.25 - Dow Jones Industrial Average
14
Figure 1.26 - FTSE 100
Figure 1.27 - ASX 200
1.4 Oil price
According to Canadian energy economist Jeff Rubin, there is a break-even point,
beyond which airlines cannot make a profit. The point exists when the world oil price
is around US $80 per barrel (Jeff Rubin 2009). This statement indicates the strong
relationship between oil price and airline’s revenue. Because Petroleum resource is
non-renewable which is being reduced year by year, its price is less possible to be as
cheap as during the financial crisis. Hence, the average oil price may remain stable
and even rise in the future.
Figure 1.28 – Crude Oil (petroleum) Monthly Price
(Average of Dated Brent, West Texas Intermediate, and the Dubai Fateh, US$ per barrel)
15
2. Industry
Qantas is classified as transportation industry by Global Industry Classification
Standard (GICS). QAN is further sub-categorized into the airline industry.
2.1 Qualitative Analysis - Porter’s Competitive Forces
2.1.1 Threat of New Entrants
Since the airline deregulation occurred in the early 90s in Australia, the competition
among airline companies becomes far more severe than before. However, due to fairly
high entry barriers for a new entrant, the number of competitors in this industry is
more possible to stick to the status quo. The first reason is that it needs a large sum of
capital to start up a new airline company. Without sufficient capital, it is nearly
impossible for a new airline company to start its business. Additionally, brand
recognition is another barrier for new entrants. In Australia, the top two airlines,
Qantas and Virgin Blue, occupy the main part of domestic airline industry who has
already established the brand recognition. Therefore, the new entrants may hard to
compete with them.
2.1.2 Bargaining Power of Buyers
The bargaining power of buyers is another factor that can affect the competitive
capacity of an industry. The customers can place more impacts on airline business
than used to be. The price sensitive customers have more choices as a result of
low-cost airlines emerging. On the other hand, the construction and development of
other kinds of transportation and infrastructure, such as rail, highway and so on, may
attract a part of customers and offer them more approaches.
2.1.3 Rivalry between Existing Competitors
The intensity of competition among existing companies in an industry is also a vital
important force in Porter’s model. It will be a new round of price war among air firms
in domestic market in the coming years. According to Figure 2.1 to Figure 2.3, the
airfares experienced a significant decline since 2008. The low-cost carriers, such as
virgin blue and Jetstar, have various plans to attract customers. For example, Jetstar
plans to cut airfares starts in December via adding 820,000 seats to the domestic
flights in 2011 (Easdown 2010). The airline firms may be willing to sell those unsold
tickets cheaply due to the high fixed cost in airline industry. This, to some extent,
gives rise of pricing war in airline industry. Virgin Blue has various competitive
approaches as well. It not only offers cheap air tickets but also cooperates with its
substitutes including car rentals, cruises and so on.
16
Figure 2.1 – Domestic Air Fares (Business)
Figure 2.2 – Domestic Air Fares (Economy)
Figure 2.3 – Domestic Air Fares (Restricted Economy)
2.1.4 Threat of Substitute Products or Services
In addition to the competition from existing rivalry, the threat from substitutes cannot
be neglected. Other modes of transportations, such as trains, ships and so on, are
competitive substitutes of aero plane. Based on Figure 2.4, the road transport grew
faster than air and space transport from 2007 to 2008. However, these substitutes may
just have moderate threat to airline industry. The main factor for customers to choose
17
other transportations rather than airplane may be the price. Nonetheless, with the
emergence of low-cost carriers in Australia domestic airline industry, the low airfare
non-stop flights attract more and more customers via the low price and convenience.
The airfare’s ‘best discount’ decreased gradually from 2009 to 2010 (Figure 2.5).
Moreover, airlines have superiority over other types of transportations in long
distance and international traveling services.
Figure 2.4 – Revenues of different industries
Figure 2.5 – Domestic Air Fare Index
18
2.1.5 Bargaining Power of Supplier
Bargaining power of supplier also has significant impact on the airline industry. There
are only two main suppliers within airline industry, Boeing and Airbus. Therefore, the
high concentration of airline industry makes the bargaining power of supplier fairly
high. Boeing and Airbus have great control over the airline industry and price the
flights arbitrarily, leading to a decrease in the margin profit of airline industry.
2.2 Quantitative Analysis and Forecasts
Airfare price is one of the most significant factors that affect the performance of
airline industry, as consumers are price-sensitive with respect to airline ticket prices.
As discussed above, the airfare price is stable and relatively low since the hit of
financial crisis, which provide a strong support for the growth of airline passenger
movements. As represented in Figure 2.6, the air passenger movements generally
followed an upward growth trend, and due to the prediction of Australia government,
the annual passenger growth rate will be of 4 percent until 2026 (Krishna Hamal
2009). Therefore, it is believed that the airline passenger movements’ growth will be
sustainable in the predicted future.
240
4.0%
Passenger movements (millions)
All airports
200
Actual
4.1%
Forecast
160
120
Capital city airports
80
3.3%
40
Non-capital city airports
2026
2024
2022
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
0
Figure 2.6 - Forecasts: Air passenger movements
On the other hand, the total revenue of domestic airline industry also experienced a
generally increasing inclination according to the statistics revealed in Table 2.7. In
comparison with the passenger growth trend, the total revenue followed a similar
growth pattern. For instance, the decline in the total passenger movements during the
year 2001/02 is effectively reflected in the historical revenue growth of a negative
14.2, which indicates a highly correlated relationship between them (IBISWorld
Industry Report).
19
Revenue (Constant Prices)
Revenue $ Million
Growth %
1995-96
4,894.2
N/A
1996-97
4,991.7
2.0
1997-98
5,045.1
1.1
1998-99
5,247.5
4.0
1999-00
5,504.6
4.9
2000-01
5,963.3
8.3
2001-02
5,116.5
-14.2
2002-03
5,545,5
8.4
2003-04
5,911.0
6.6
2004-05
6,280.6
6.3
2005-06
6,399.7
1.9
2006-07
6,613.6
3.3
2007-08
7,525.8
6.0
2008-09
7,546.2
0.3
Table 2.7 – Australia Airline Industry historical revenue
However, apart from the passenger growth, there are other factors that influence the
revenue generated by the industry. Based on the estimation of economy in the first
part, both domestic as well as foreign demand is backed up by the recovery GDP over
the world. Nonetheless, the downside is that the potentially increasing in crude oil
price will be continuously challenging the domestic airline industry as it is crucial to
industry’s fuel costs control. If the price of fuel increases by 50%, the average annual
passenger growth rate would decline from 4.0% to 3.4% (Krishna Hamal 2009).
Conversely, the strong economy of Australia and a controllable level of expected
inflation rate will lead to the strength of the purchasing power of home currency
which will, to some extent, contribute to the cost control of Airline Company.
Hence, taken into account of these factors, it is estimated that the airline industry will
stick to an upward trend and growth rate is predicted to be 2.6% in 2011 and 3.8% in
2012 (Table 2.8).
Table 2.8 - Australia Airline Industry projected revenue
Source: IBISWorld
20
3. Company Analysis
Followed by the evaluation of the broad economy and industry circumstances, an
analysis of the individual company can be made to take a closer look at how the
company is performing and to predict its future performance.
3.1 Company profile
Qantas Airways Limited (QAN) is an airline company, listed on the Australian stock
exchange in 1995. It provides both domestic and international air transportation
services using two airline brands: Qantas and Jetstar. The company also provides
freight services, sells domestic and international holiday tours and other related
services like catering, engineering and maintenance. Today, the company offers
services to 184 destinations in 42 countries. It is the largest domestic and international
airline company in Australia.
3.2 Company strategies
The strategies of Qantas can be classified into four types: defensive, offensive, low
cost and differentiating strategies.
1. Defensive and offensive strategy:
To enhance its competitive power in the airline industry, QAN continues to expand
new network in both domestic and international areas, one of which is to set up a
strong Asian network through its low-cost carrier Jetstar. (Refer Qantas 2010, p12)
In addition, the company consistently innovates in its customer services, develops
new and enhanced products, and makes efforts to improve other segments like
infrastructure, leading edge technology and training. In February 2010, the company
announced a $400 million, three-year program to upgrade nine B747-400 aircraft and
reconfigure the A380 fleet to meet forecast changes in passenger demand (see Qantas
2010, p17). Through fleet renewal program, QAN could provide more safe and
reliable services and increase its competition ability in the market.
2. Differentiating strategy:
The major strategy of the company in 2010 is to keep developing the two
complementary airline brands - the full service Qantas and the low fares Jetstar. The
investment in both continues to enhance the company’s domestic and international
footprints and meet the needs of different market segments. They give the company
an optimal 65% Australian domestic market share, and provide the best opportunities
to develop an expansive and profitable international network.
21
3. Low cost strategy:
From the aspect of reduction in operating cost, the company mainly devotes to reduce
the manpower and fuel costs. In 2009 QAN announced a three-year business
transformation program, QFuture, to save cost in manpower, fuel conservation and
other direct expenses for a total $1.5 billion benefits by the end of 2011/2012.
Through this program, a saving of $533 million was achieved in this fiscal year.
(Refer Qantas 2010, p17)
3.3 Swot Analysis
The aim of a SWOT analysis is to identify the key internal and external factors which
have a significant impact on the intrinsic value of QAN’s shares. SWOT analysis
groups key pieces of information into two main categories:
Internal factors - The strengths and weaknesses internal to the organization;
External factors- The opportunities and threats presented by the external environment.
Table 3.1: Swot analysis
Strengths
- Good brand image
- 65% domestic market share and 30%
international passenger travel to and
from Australia
- Better regional network expansion
and destinations
- Excellent safety record
- Ability to sustain lower price
- Strong corporate strategies
Weaknesses
- Exchange rate risk
- Aircraft maintenance
- Possibility of worker strike
Opportunities
- Recovery of Australian and global
economy
- Increase in passengers relying on
flight transportation
- Growing air travel in Asia Pacific
(Qantas Annual Report 2010)
- Growth in Austria tourism industry
Threats
- Low-cost flights/freight by other
competitors
- Increase of fuel price
- Environment factors- e.g. Volcanic
Ash from Iceland and H1N1
influenza.
- Economic crisis
22
3.4 Ratio Analysis
In addition to the evaluation of QAN’s strategy via SWOT approach, a further
analysis of its financial statements from year 2005 to 2010 (see Appendix 1) is applied
here. This is used to assess QAN’s financial ‘health’ over period and its position
within the industry. It is useful to identify the company’s underlying trends and
developments, which forms the basis of investment expectations as well. (Jones,
Shamsuddin and Naumann 2007, 435)
Several specific ratios, which reflect the corporation’s financial situation from
different aspects, are calculated from the financial statements and compared to the
industry average as well as its key competitors within the Australian airline industryVirgin Blue (VBA) in domestic market and Air New Zealand (AIZ) in international
market.
3.4.1 Liquidity Ratio
For current and quick ratio, a benchmark of “1” would generally indicate that the
company has exactly enough “cash” to pay off its short term debt.
Liquidity ratio
Yr
1
Current
Ratio
(CA/CL)
ratios
0.8
0.6
0.4
2004
2005
2006
2007
2008
2009
2010
Current Ratio
quick ratio
2011
2010
Year
2005
2006
2007
2008
2009
2010
VBA
AIZ
Industry
Quick
Ratio
(CA-Inve
ntory)/CL
0.8
0.93
0.87
0.74
0.89
0.93
0.76
1.05
0.73
0.87
0.84
0.71
0.85
0.88
0.76
0.95
0.86
0.78
Figure 3.2: Liquidity ratios of Qantas from 2005 to 2010
Table 3.2: Liquidity ratios of Qantas (2005-2010), of VBA, AIZ and industry in 2010
As shown in table 3.2, QAN’s quick ratio was 0.88 in 2010 which was lower than its
competitor AIZ. It implies that QAN could only cover about 88% of its short term
liabilities during this period. However, according to the industry ratio of 0.78, QAN’s
solvency was about 13% stronger than the average and therefore, acceptable.
The current ratio of the company was slightly higher over the period- this seems to
come from inventories. (See figure 3.2)
23
3.4.2 Risk Analysis Ratio
D/E ratio
1
Ratio
0.9
0.8
0.7
2005
2006
2007
2008
2009
2010
2011
2010
0.6
2004
Yr
2005
2006
2007
2008
2009
2010
VBA
AIZ
Industry
Year
LT-D/E
0.81
0.88
0.68
0.62
0.85
0.85
1.64
0.57
D/E
0.86
0.95
0.82
0.73
0.95
0.96
1.92
0.69
1.87
2.3
Figure 3.3: D/E ratios of Qantas from 2005 to 2010
Table 3.3: Risk analysis ratios of Qantas (2005-2010), of VBA, AIZ and industry in 2010
The leverage position of QAN has fluctuated over the 5 years. In 2009 and 2010, the
QAN’s leverage increased by about 30% to 0.95 and 0.96, respectively. According to
QAN annual report 2009 (Qantas 2009, p.59) and 2010 (Qantas 2010, p.19), QAN
purchased 11 new aircraft and leased a further 12 in 2009/2010. This resulted in an
increase in the company’s long term debt and a corresponding increase in its gearing.
QAN’s competitor, Air New Zealand had the lowest financial leverage. VBA’s D/E
ratio was significantly higher, which might be resulted from its plan of purchasing up
to 105 new aircraft from Boeing (BBC news). With an industry average of 2.3, QAN
is still appropriately geared and has a medium to low financial risk.
3.4.3 Efficiency Ratio
Efficiency ratios measure how effectively company does business.
Table 3.4: Efficiency ratios of Qantas (2005-2010), of VBA, AIZ and industry in 2010
Yr
Inventory
turnover*
Asset
Turnover#
2005
2006
2007
2008
2009
2010
VBA
AIZ
Industry
38.03
40.75
84.11
73.01
58.2
43.17
-
18.69
8.71
0.7
0.71
0.77
0.8
0.73
0.69
0.82
0.84
0.07
*
Inventory turnover = operating revenue/inventory
Asset turnover = operating revenue/TA
#
24
It can be seen from the table 3.4, QAN’s efficiency ratios had reached a peak in year
2007-2008, which indicates successful efforts by management to improve efficiency.
Since then, however, the turnover has dropped considerably over the last two years.
The less efficient utilization of assets was mostly caused by the decrease of its
operating revenue. (See Appendix 1) This could be explained by the global financial
crisis, which resulted in a sharp decrease in demand for air travel. In addition, QAN
also lags behind its main competitors who have higher asset turnover ratios.
Nevertheless, compared with the industry average, QAN is much more effective in
managing its assets.
3.4.4 Profitability Ratio
Refer to figure 3.5, the drop of QAN’s profits in 2006 is due to a sharp rise in fuel
prices. Strategies of the company to improve fuel efficiency and to save costs resulted
in regaining of the profitability in 2007 and 2008.
Profitability
Yr
14.00%
Net
profit
margin
12.00%
= NPAT /
10.00%
operating
revenue
8.00%
6.00%
4.00%
2.00%
0.00%
2005
2006
2007
Year
net profit margin
2008
ROE
2009
ROA
2010
2005
2006
2007
2008
2009
2010
VBA
AIZ
Industry
5.63%
4.08%
5.18%
4.71%
0.98%
1.24%
0.71%
2.03%
-0.30%
ROE
ROA
= NPAT
= NPAT
/ TE
/TA
11.08%
9.16%
12.69%
12.95%
2.50%
2.88%
2.82%
5.17%
1.64%
4.74%
3.70%
4.93%
4.62%
1.52%
1.76%
0.59%
1.7%
0.32%
Figure 3.5: Profitability ratios of Qantas from 2005 to 2010
Table 3.5: Profitability ratios of Qantas (2005-2010), of VBA, AIZ and industry in 2010
In year 2009, however, there was a dramatic decrease in profitability ratios: net profit
margin and ROE dropped by nearly 80% and ROA by 67%. This was primarily
caused by a decrease in capacity and demand in both domestic and international
markets, which was due to the economic downturn as well as the fierce competition.
In 2010 the profit of Qantas was still negatively affected by the global financial crisis,
as well as some external factors such as the H1N1 influenza outbreak and the closure
of European airspace in response to Icelandic volcanic activity. However, compared to
25
2009, profitability ratios did go up, which can be indicated by the 15% increase in
both ROE and ROA ratios. It implies that Qantas might be recovering from the lows
after global financial downturn.
AIZ has highest profitability, possibly due to better management. According to the
industry data, Qantas performs well above average and is in a relative strong position
in the airline industry.
3.4.4 Du Pont Analysis
The Du Pont identity breaks down ROE into three distinct elements: profit margin,
total asset turnover and equity multiplier. This analysis enables the investors to
identify the real drivers behind ROE.
Table 3.6: Du pont analysis
Profit
Margin
(PM)
Total Asset
Turnover
(ATA)
Equity
Multiplier
(EM)
ROE
2005
2006
2007
2008
2009
2010
0.06
0.04
0.05
0.05
0.01
0.01
= Sales/TA
0.7
0.71
0.77
0.8
0.73
0.69
= TA/TE
2.91
2.98
3.16
3.29
3.46
3.40
0.11
0.09
0.13
0.12
0.02
0.03
= Net
income/sales
= PM*TAT
*EM
Looking at the table 3.6, the performance of the company and its ROE-ratio has
remained relative stable from 2005 to 2008. QAN’s dramatic fall in ROE in 2009 and
2010 could be pinpointed mainly to the decline in the net profit margin and the higher
level of debt employed.
Overall, Air New Zealand has lowest financial risk, highest profitability as well as
asset turnover compared to the other two. It also beats Qantas in customer satisfaction
this year as AIZ won the best Australia-Pacific airline in global awards (Refer
SKYRAX). Nevertheless, Qantas still rank among the best in the industry. QAN is
showing signs of recovery with both demands and profitability continuing to improve.
26
3.5 Valuation
The intrinsic value of QAN’s share is calculated using the free cash flow model and
this is supplemented by the earnings multiplier approach.
3.5.1 Free Cash Flow Model
Free Cash Flow model (FCF) is a measure of financial performance calculated as
operating cash flow minus capital expenditures. FCF represents the cash that a
company is able to generate after laying out the money required to maintain or expand
its asset base. FCF is important since it allows a company to pursue opportunities that
enhance shareholder value. Without cash, it is tough to develop new products, make
acquisitions, pay dividends and reduce debt.
The equation of FCF model is:
FCFE=CFO + FClnv + Net Borrowing + Net Debt Repayment
Where:
CFO = cash flow from operating activities = NI + NCC – WClnv
FClnv = Capital Expenditure
NI = Net Income or Net Profit After Tax (NPAT)
NCC = Non Cash Changes (Depreciation and Amortization)
WCInv = Working Capital Changes
In order to determinate an ordinary share price, each component of FCFE is estimated,
and the discount rate (Ke) is computed using CAPM model.
3.5.1.1 Assumption of inputes into the model
1. Net Income (NPAT) and the Non-Cash Components
Based on the macroeconomic forecasts, a market rise is predicted. Australia’s
economy might have reached the bottom of the business cycle and is now starting to
recover from the global financial crisis. Since the airline industry is cyclical industry,
which is sensitive to business cycles and whose performance is tied to the overall
economy, it is believed that the industry will do better in the following years as well.
At a company level, QAN outperforms the industry average and its current strategies
such as two brand strategy and Q-future program will help it regain profitability more
effectively. So it’s reasonable to assume that the growth rate of NPAT will be doubled
in 2011 and then increase at a decreasing rate till 2015. After QAN reaches its average
NPAT, the long-term sustainable growrh rate is assumed to be 5% p.a.
NCC (“Non Cash Components”) represents depreciation and amortization. The
increase rate of depreciation depends on the growth rate of cash paid for Property,
Plant and Equipment (PPE). The average growth rate of cash paid for PPE was 9%
(See table 3.7) and it was used to predict the future growth rate between 2011 and
2015.
27
Table 3.7: Forecast NCC
Forecast Depreciation
(in $m)
Cash paid for PPE
Growth Rate
Average Growth Rate
2008
2009
2010
1,424
9%
1,530
7.44%
1,688
10.33%
2. Borrowing and Debt Repayment
Actual net borrowings are sourced from the Cash Flow Statement for each financial
year. According to the company strategies, QAN will keep their significant investment
in purchasing new fleet in the next eight years. Therefore, we assume that the major
financial decision will not change from 2011 to 2015. An average amount of proceeds
from Borrow (see table 3.8) between 2009 and 2010 was used to forecast net
borrowing in the following years.
Table 3.8: Forecast Net Borrow
Forecast Net borrow
(in $m)
Proceeds from Borrow
2008
2009
2010
Average
342
1,468
1,352
1,054
Actual average debt repayment for the last 3 years is 19% (see Appendix 2, list 1) as a
percentage of total non-current interest bearing liabilities. Therefore, 19% of total
outstanding long-term debt was used to predict Net Debt Repayment from 2011 to
2015. Non-current debt was expected by using the last 3-year moving average. (Refer
table 3.9)
Table 3.9: Forecast Net Debt Repayment
Forecast Net Debt
Repayment
(in $m)
Non-current Debt
Net Debt Repayment
2011
2012
2013
2014
2015
4,326
785
5,927
1,075
6,174
1,120
5,239
950
7,177
1,302
28
3. Working Capital
According to Appendix 2, list 2, Average Working Capital is showed as 23.78% of
total revenue from 2006 to 2010. On this basis, Working Capital was predicted to be
23.78% of estimated total revenue from 2011 to 2015. (Refer table 3.10)
Table 3.10: Forecast Working Capital
Forecast Working
Capital
(in $m)
Total Revenue
Working Capital
working Capital changes
2011
2012
2013
2014
2015
14,736
3,504
10
15,915
3,785
280
17,188
4,087
303
18,219
4,333
245
19,313
4,593
260
4. Capital Expenditure
Payment for Property, Plant and Equipment (PPE) and proceeds from disposal of PPE
are sourced from the Cash Flow Statement. The average Capital Expenditure over the
last 3 years is $1,374m (see table 3.11). Based on the assumption that the
management’s major investment decisions will not change significantly over the next
five years, the Capital Expenditure will keep the same amount over this period.
Table 3.11: Forecast Capital Expenditure
Forecast Capital
Expenditure
(in $m)
Capital Expenditure
2008
2009
2010
Average
1,380
1,155
1,587
1,374
5. Cost of Equity:
The required rate of return on equity is estimated via the capital asset pricing model
(CAPM). Each investor is assumed to diversify their portfolio; therefore, only
systematic risk is rewarded. The CAPM equation can be written:
E(Ri) = Rf + βi (E(Rm) – Rf)
where
E(Ri) = the expected return on the asset i;
E(Rm) = the expected return on the market;
Rf = the risk-free rate of return;
βi = systematic risk relative to the market.
Here, the risk-free rate of return is proxied by the arithmetic average of ten-year
treasury bonds yield from 2005 to 2010. According to Appendix 3, list 1, Rf is 5.57%.
29
The expected return on the market is estimated by measuring the geometric average of
the returns on the S&P/ASX 200 Index from year 1983-2010 (28 years). The
geometric mean is preferred here as it reflects compound, cumulative returns over
more than one period. Refer to Appendix 3, list 2, the estimation of E(Rm) is 10.61%.
The beta of QAN’s share is defined through market model in the ‘preparation’. Refer
to Appendix 3, list 3, Qantas has a current beta of 1.36, which indicates that QAN is
more volatile compared to the market in terms of its systematic risk.
Based on the estimates above, the expected rate of return on QAN’s equity is:
Ke = E(Ri)
= 5.57% + 1.36* (10.61%-5.57%)
= 12.42%
30
3.5.1.2 Free Cash Flow Models
According to the above expectations on future cash flows and cost of equity, the
intrinsic value of the share is calculated as follows using FCF model:
Table 3.12: Valuation via FCF model
Calculating the Share Price PV at September 17
(FCFE)
NI(NPAT)
NCC
NET Borrowing
NET Debt Repayment
WCInv
FCInv
FCFE
2010
2011
224
1,295
1,054
(785)
10
(1,374)
424
2012
314
1,399
1,054
(1,075)
280
(1,374)
597
2013
408
1,510
1,054
(1,120)
303
(1,374)
781
2014
489
1,631
1,054
(950)
245
(1,374)
1,096
2015
543
1,762
1,054
(1,302)
260
(1,374)
943
PV of FCFE 2011
377
PV of FCFE 2012
473
PV of FCFE 2013
550
PV of FCFE 2014
686
PV of FCFE 2015
525
Terminal value of 2015
PV OF Terminal value of
2016
Pv of terminal value
7,432
NPV
10,042
Number of ordinary shares
2,265
Value per share
4.43
943
13,344
Present Value of Free Cash
Flow@12.42%
Assumed
long-term
sustainable
growth rate 5%
31
3.5.2 Earnings Multiplier Approach
An alternative way to valuate the share price is the earnings multiplier approach. To
calculate the earnings multiplier, we multiply the estimated earnings per share (EPS)
by estimated P/E ratio.
The P/E ratio of a firm can be affected by the firm’s future growth prospects, the risk
associated with the firm and the investor’s expectation. The ratio is inversely related
to interest rate.
Table 3.13: P/E ratio of Qantas from 2001 to 2010
year 2001 2002 2003 2004
P/E 15.01 15.69 11.63 9.92
mean 15.18
2005 2006 2007 2008 2009 2010
8.89 10.28 14.09 7.9 29.22 29.14
P/E
35
30
25
20
15
10
5
0
2000
2002
2004
2006
2008
2010
2012
Figure 3.13: P/E ratio of Qantas from 2001 to 2010
As shown in table 3.13, the historical P/E ratios of QAN from 2002 to 2010 are in the
range of 7.9 to 29.22 with an average of 15.18. The abnormal high ratios in year 2009
and 2010 are probably resulted from the heavy shrinkage in earnings.
According to the government policy to maintain the interest rate at the current level in
the near future, P/E should not be affected by interest rate. As discussed in FCF model,
QAN is expected to be recovering from the financial crisis and may perform better in
FY2011.
So it is reasonable to assume that QAN’s P/E ratio will gradually decrease to its
normal average level. A fair P/E ratio for Qantas is estimated to be around 23.
It is also expected that earnings of QAN will increase in the following years.
According to its 10-year historical data from 2001 (see table and figure 3.14), QAN’s
EPS is averaged at 27.51 cents. However, changes in fuel prices, foreign exchange
rates and general trading conditions could rapidly impact earnings. The price of fuel,
which accounts for about 35% of the cost of QAN, is expected to increase by 13% in
2011. In addition, QAN is in competition with a large array of domestic and
32
international airlines like AIZ and VBA. We should, therefore, not be too optimistic
about the market and assume that QAN will need years back to its average level of
earnings. It is estimated that the EPS for 2011 will increase to 15.1 cents.
Table 3.14: EPS of Qantas from 2001 to 2010
year
EPS
(cents)
mean
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
23.11 29.06 28.11
27.51
35.5
37.92 28.79 39.75 38.46
6.88
7.55
EPS (cents)
45
40
35
30
25
20
15
10
5
0
2000
2002
2004
2006
2008
2010
2012
Figure 3.14: EPS of Qantas from 2001 to 2010
Via the earnings multiplier approach, the estimated price of Qantas share is $3.47
(=23*$0.15).
33
3.5.3 Summary of valuations
When using Earnings Multiplier Approach, investors need to forecast its EPS and P/E
ratios by their expectation. Dealing with an uncertain future is always subject to errors.
In practice, however, Earnings Multiplier remains popular for its ease in use and the
objections to discounted cash flow approaches like free cash flow model.
Compared with Earnings Multiplier, FCF is believed to be a more trustworthy
analysis to identify where the company’s value is coming from and whether its current
share price is justified (refer Investopedia). However, a small change in the growth
rate will have a large impact on the present value of the FCFs. The assumptions about
the components are critical to the valuation as well.
Below is a summary of the share price valuation for Qantas:
Table 3.15: Summary of share price valuations
Valuation Method
(Estimated) Share Price
Actual Share Price (as of Sept 17, 2010)
$2.68
Free Cash Flow Model
$4.43
Earnings Multiplier Approach
$3.47
CAPM
12.42%
34
4. Recommendation
Based on the top-down fundamental analysis above, global and Australian economy
represents a gradual recovery from economic recession. The prospect of the airline
industry is looking fairly promising as well.
FCF and P/E multiplier estimate the intrinsic value of Qantas’ share to be $4.43 and
$3.47 respectively. Compared to the current market price of $2.68, both methods
suggest that the share price of Qantas is undervalued.
Our recommendation on Qantas is buy.
35
Reference
ASPECTHUNTLEY FinAnalysis. Statement on Annual Financials.
http://www.aspecthuntley.com.au.ezp01.library.qut.edu.au/af/finhome?xtm-licen
see=finanalysis (accessed September 19, 2010).
BBC NEWS 2010. Australia’ Virgin Blue to buy 105 new Boeing planes.
http://news.bbc.co.uk/2/hi/business/8598463.stm (accessed September 19, 2010)
China Economic Review. 2010
http://www.chinaeconomicreview.com/dailybriefing/2010_04_22/IMF_raises_C
hina_2011_GDP_forecast_to_99.html (Accessed September 15, 2010)
Digital Look - Research [cited 2010 May 1]. Available from:
http://www.digitallook.com/cgi-bin/dlmedia/security.cgi?username=&ac=&csi=
823669
Easdown, G. 2010. Travellers set to benefit from airline price war. The Daily
Telegragh.
http://www.dailytelegraph.com.au/travel/news/travellers-set-to-benefit-from-airli
ne-price-war/story-e6frezi0-1225911628903 (accessed September 17, 2010)
Fernando, V. 2010. IMF Hikes Global Growth Forecast, Shows U.S. Leading The
Developed World. Business Insider
http://www.businessinsider.com/imf-increases-global-growth-forecast-2010-7
(Accessed September 15, 2010)
FOMC Statement. FED TO BUY TREASURIES WITH MATURING MORTGAGE DEBT. 2010
http://www.tradingeconomics.com/Economics/Interest-Rate.aspx?Symbol=USD
(accessed September 15, 2010)
Global PMI, Global economy remains on recovery. 2010.
http://www.markit.com/ (accessed September 16, 2010)
Investopedia.n.d.
http://www.investopedia.com/features/industryhandbook/airline.asp
September 18, 2010)
(accessed
IBISWorld Industry Report - Australia Airline Industry historical revenue. 2009.
http://www.ibisworld.com/ (accessed September 15, 2010)
Jones, C.P., A. Shamsuddin and K. Naumann. 2007. P435-439. Investments Analysis
36
and Management. 2nd ed. Milton: John Wiley & Sons Australia, Ltd
Krishna Hamal. 2009. Bureau of Infrastructure, Transport and Regional Economics.
Australian aviation – coping with growth. Australia: Bureau of Infrastructure,
Transport
and
Regional
Economics.
http://search.infrastructure.gov.au/search/click.cgi?url=http%3A%2F%2Fwww.
bitre.gov.au%2Fpublications%2F55%2FFiles%2FKrishna%2520Hamal.ppt&ra
nk=1&collection=Infrastructure (accessed September 15, 2010)
Qantas Airways Limited. 2010. Annual Report. Available from:
http://www.qantas.com.au/infodetail/about/investors/2010AnnualReport.pdf
Qantas Airways Limited. 2009. Annual Report. Available from:
http://www.qantas.com.au/infodetail/about/investors/preliminaryFinalReport09.p
df
Qantas Airways Limited. 2010. Media Release. Available from:
http://www.qantas.com.au/regions/dyn/au/publicaffairs/introduction?ArticleID=
2010/jun10_intro
Reserve Bank of Australia. Glenn Stevens.2010.Australia Extends Rate Pause.
http://www.tradingeconomics.com/Economics/Interest-Rate.aspx?Symbol=AUD
(accessed September 15, 2010)
Rubin, J. 2009. Petroleum industry and trade. Why Your World Is about to Get a
Whole Lot Smaller.
http://books.google.com.au/books?id=L3K8QQAACAAJ&dq=Why+Your+Worl
d+is+About+to+Get+a+Whole+Lot+Smaller&hl=en&ei=wfKWTKyXNYqGvA
Od9-SZDQ&sa=X&oi=book_result&ct=result&resnum=1&ved=0CCoQ6AEw
AA (accessed September 15, 2010)
SKYRAX WORLD AIRLINE AWARDS.2010.
http://www.worldairlineawards.com/Awards-2010/austpac.htm (assessed
September 19, 2010)
The Australia Business with The Wall Street Journal
http://djcs.theaustralian.news.com.au/custom/theaustralian-com-au/html-advance
d-chart.asp?symb=XJO&sid=171965# (Accessed September 17, 2010)
Trading Economics. 2010.
http://www.tradingeconomics.com/Economics/GDP-Growth.asp
x?Symbol=USD (Accessed September 15, 2010)
37
Virgin Blue Corporate Information.
http://www.virginblue.com.au/AboutUs/index.htm (accessed September 17,
2010)
Yahoo!7 Pty Limited. Queensland Airway Limited [document on the internet]
[updated 2010 September 19; cited 2010 September 19] Available from:
http://au.finance.yahoo.com/q/tt?s=QAN.AX
38
Appendix 1: Financial Statements of Qantas
(2005-2010)
(in $m)
EARNINGS
SUMMARY
Trading Revenue
Expenses
EBITDA
EBIT
Net Interest Expense
Pre Tax Profit
Tax Expense
NPAT
EPS Adj (cents)
Dividends (cents)
2005
2006
2007
2008
2009
2010
12,649
(10,758)
2,222
1,122
(95)
1,027
(315)
764
38
20
13,643
(11,594)
2,053
803
(55)
748
(191)
480
29
22
15,166
(12,690)
2,476
1,113
(15)
1,098
(313)
719
40
30
15,749
(13,588)
2,604
1,135
46
1,180
(438)
969
38
35
14,552
(12,933)
1,619
229
(22)
207
(58)
117
7
6
13,772
(12,261)
1,511
312
(75)
237
(62)
112
8
--
BALANCE SHEET
SUMMARY
Cash
Total Current Assets
PP&E
Intangables Ex. Goodwill
Goodwill
Investments
Total Assets
S/T Debt
Total Current Liabilities
L/T Debt
Total Debt
Total Liabilities
Net Assets
NTA
206
3,710
19,216
45
97
444
18,134
315
4,635
5,235
5,550
11,708
6,427
6,285
2,902
5,053
19,766
200
112
1,193
19,183
441
5,430
5,335
5,776
13,102
6,081
5,769
3,363
5,634
20,824
233
133
913
19,606
864
6,504
4,211
5,075
13,411
6,195
5,829
2,599
5,616
20,906
302
147
754
19,700
587
7,604
3,573
4,160
13,965
5,735
5,287
3,617
5,966
21,628
427
237
734
20,049
608
6,714
4,895
5,503
14,284
5,765
5,101
3,704
5,832
12,516
668
0
483
19,910
619
6,241
5,099
5,718
13,929
5,981
5,313
CASH FLOW
SUMMARY
Operating Cash Flow
Investment Cash Flow
Financing Cash Flow
Net Cash Increase
1,950
(1,396)
(15)
539
2,026
(890)
(138)
998
2,353
(1,220)
(672)
461
2,128
(1,323)
(15,770)
(764)
1,129
(1,163)
1,052
1,018
1,307
(1,601)
381
87
39
Appendix 2: Free Cash Flow Model
List 1: Proportion of debt repayment in total non-current interest bearing liabilities
Yr
non-current interest bearing liabilities
(in $m)
Repayment of Borrowing
(in $m)
Proportion
Average percentage
2008
2009
2010
3,573
4,895
5,099
784
653
974
21.94%
19.00%
13.34%
19.10%
List 2: Proportion of working capital in total revenue
Yr
Total Revenue (in $m)
Working Capital (in $m)
Proportion
Average percentage
2006
13,647
2,838
20.80%
23.78%
2007
15,116
3,369
22.29%
2008
16,192
4,000
24.70%
2009
14,552
3,757
25.82%
2010
13,772
3,494
25.37%
40
Appendix 3: Capital Asset Pricing Model (CAPM)
List 1: Risk-free rate (Rf)
Month
1/07/2010
1/06/2010
3/05/2010
1/04/2010
1/03/2010
1/02/2010
4/01/2010
1/12/2009
2/11/2009
1/10/2009
1/09/2009
3/08/2009
1/07/2009
1/06/2009
1/05/2009
1/04/2009
2/03/2009
2/02/2009
2/01/2009
1/12/2008
3/11/2008
1/10/2008
1/09/2008
1/08/2008
1/07/2008
2/06/2008
1/05/2008
1/04/2008
3/03/2008
1/02/2008
1/01/2008
Ten-year Treasury
bonds yield (Rf)
5.19%
5.22%
5.19%
5.40%
5.44%
5.35%
5.20%
5.27%
5.34%
5.58%
5.75%
5.74%
5.83%
5.77%
5.60%
5.67%
5.60%
5.70%
5.88%
5.81%
5.74%
5.91%
5.92%
6.20%
6.15%
5.93%
5.99%
6.17%
6.03%
6.21%
6.08%
Month
3/12/2007
1/11/2007
1/10/2007
3/09/2007
1/08/2007
2/07/2007
1/06/2007
1/05/2007
2/04/2007
1/03/2007
1/02/2007
1/01/2007
1/12/2006
1/11/2006
2/10/2006
1/09/2006
1/08/2006
3/07/2006
1/06/2006
1/05/2006
3/04/2006
1/03/2006
1/02/2006
2/01/2006
1/12/2005
1/11/2005
3/10/2005
1/09/2005
1/08/2005
1/07/2005
Mean
Ten-year Treasury
bonds yield (Rf)
6.29%
6.09%
6.17%
6.36%
6.59%
6.37%
5.86%
5.65%
5.22%
4.94%
4.22%
4.09%
4.25%
4.33%
4.51%
5.00%
5.56%
5.49%
5.53%
5.32%
5.45%
5.47%
5.47%
5.56%
5.48%
5.62%
5.79%
5.48%
5.33%
5.14%
5.57%
41
List 2: Market return (Rm):
Yr
S&P/ASX 200
index TR (%)
RR
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-13.08
65.53
-1.43
42.54
50.11
-5.81
17.89
16.59
-15.64
32.84
-2.34
43.24
-7.99
19.18
13.69
11.8
10.98
15.23
5.1
10.03
-8.09
13.62
26.33
18.62
23.67
-16.89
-24.17
8.7
0.8692
1.6553
0.9857
1.4254
1.5011
0.9419
1.1789
1.1659
0.8436
1.3284
0.9766
1.4324
0.9201
1.1918
1.1369
1.118
1.1098
1.1523
1.051
1.1003
0.9191
1.1362
1.2633
1.1862
1.2367
0.8311
0.7583
1.087
CWI
geometric
mean (Rm)
16.83
10.61%
42
List 3: Beta estimation of Qantas using market model
(07. 2005- 07. 2010)
SUMMARY
OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted
Square
0.6292
0.3958
R
0.3854
Standard Error
0.078
Observations
60
ANOVA
df
SS
MS
Regression
Residual
1
58
0.23117
0.35281
Total
59
0.58398
Co-efficients
Standard
Error
-0.0023
0.01007
-0.232
0.817
1.3616
0.22088
6.1646
7E-08
Intercept
X Variable 1
0.2312
0.0061
F
t Stat
38.002
P-value
Significance
F
7.284E-08
Upper
95%
Lower
95.0%
Upper
95.0%
-0.0224966
0.0178
-0.022
0.0178
0.91948447
1.8037
0.9195
1.8037
Lower 95%
Beta =1.36
43