Qantas's share price has been trading in a narrow range for the past six months, with the price shuffling between $3 and $3.40.
Price movement
Qantas's share price has been trading in a narrow range for the past six months, with the price shuffling between $3 and $3.40.
Profile
The company has been flying for more than 80 years, but it was only privatised by the Federal Government in July 1995. Freight and passenger movement is its business, and it owns several subsidiaries that provide complementary services, such as engineering and maintenance, catering, and holiday and travel tours.
British Airways owns 19 per cent of Qantas and has stated that it intends remaining a shareholder. If this stance alters, the share price could be volatile until the shares are safely bedded down. Qantas also owns 46 per cent of Air Pacific.
Current details British Airways has recently announced a record loss. It is also feeling the pressure of discount airlines squeezing margins at a time when passengers have dropped.
Qantas is currently seeking to take a 22.5 per cent shareholding in Air New Zealand at a cost of $550 million. However, both countries' competition commissions are not comfortable with the longer-term consequences of such a deal. The New Zealand Commerce Commission has detailed a negative prognosis for that country's consumers. The New Zealand Government bailed out Air New Zealand and remains the majority shareholder, with 82 per cent.
Write-downs and redundancies have taken their toll on Qantas's profit expectations, which will be realised on August 21. A $450 million net profit before abnormal items may be possible, but the devil will be in the detail. This places the stock on a 12 times P/E ratio. The 17 cents per share dividend is covered 1.5 times by this net profit, making a current dividend yield of 5.4 per cent fully franked.
Sector
Worldwide, airline companies are rationalising and adapting to the major forces driving air travel. These are a sluggish global economy, discount or low-cost airlines and safety issues (health and terrorism).
Airlines are capital- and labour-intensive, with full flights the only sure way to ensure profitability. Many airlines are making strategic alliances to give them additional market share. These alliances do not usually require a capital investment, as does Qantas and Air New Zealand. The effect of the transaction would be to block any Qantas competitor controlling Air New Zealand.
Worth buying?
The company has been well-managed and this makes it an ideal company to acquire on weakness. Long-term investors taking a counter-cyclical approach could consider a $2.60-$2.80 entry level at a P/E of 10 and dividend yield of 6 per cent.
Disclosure: Geoffrey Hill owns some Qantas August Put options., Geoffrey Hill is the presenter of ABC NewsRadio's daily afternoon finance report and is an independent private client adviser. Online: www.ghill.com.au
