Qantas stock has traded strongly on the Australian Securities Exchange over the past few months, with the airline company’s share price climbing 31 per cent from a low of $3.01 in November last year to its current level around $3.94.
Macquarie Securities says that, despite, this strong growth, the stock is still trading at discount based on the ratio of its enterprise value to earnings. Qantas’s current EV/EBITDA multiple is 3.7 times, compared with a long-term average of 4.8 times.
EV/EBITDA is a measure of enterprise value as a multiple of earnings before income, tax, depreciation and amortisation. It is used as a measure of a company’s return on investment.
Macquarie says there are number of factors that could lead to an increase in that valuation multiple and it has put a 12-month price target of $4.90 on the stock – a further 50 per cent increase.
The Qantas Loyalty division enjoys double-digit membership and earnings growth by continuing to diversify offerings, such as Qantas Assure Health and Qantas Assure Life.
Qantas domestic is a strong performer, protected by a low level of domestic competition, with capacity growth likely to remain muted for the medium term. Moderate capacity growth, which is expected to be only 0.6 per cent his financial year, will support ongoing stable earnings growth from the domestic business.
Capacity growth in international raises some concerns, with growth of more than 10 per cent in the first half of the financial year.
However, Macquarie says Qantas has relatively low exposure to regions where capacity growth is high, such as China and the Middle East. Its focus in on the Australia-US route, where it deploys 28 per cent of its international capacity, and the Australia-Japan route, where it deploys 11 per cent of international capacity.
In addition, The Jetstar division is going through a profitable growth cycle.
Macquarie has done a sum-of-parts analysis of the Qantas business, assigning what it considers a conservative equity value of $3.43 to the domestic business, $1.40 to international, $3.09 to Jetstar and $1.51 to loyalty. Even after discounting for debt and other factors, the valuation range is well in excess of the current share price.
“Qantas’s current share price is less than the combined equity value of Qantas Domestic and Jetstar. Qantas International and Loyalty are valuable assets that are not recognised in the current share price,” it says.
The question is how Qantas can unlock that value. Macquarie says that an investor day to be held on May 5, coinciding with a March quarter business update, might prove to be a catalyst for a further move in the stock price.
“We think the focus of the investor day will be on the loyalty business, which our analysis suggests is the most undervalued element in the current share price.”
