employes perspective
15th Jan 2008, 06:06
Qantas shares slump after Merrill downgrade
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January 15, 2008 - 4:45PMQantas (http://markets.smh.com.au/apps/qt/quote.ac?code=qan) has received a broker downgrade to "sell" from "neutral" on the view that the airline could face headwinds in fiscal 2009.
Two other brokers, however, have maintained "buy" ratings on the stock.
Merrill Lynch, which downgraded the stock, kept its fiscal 2008 forecast unchanged, saying it still expects the national carrier to beat its current guidance of 40 per cent earnings growth.
But the company said it expects Qantas's earnings to decline in fiscal 2009.
"We expect earnings growth to turn negative late in calendar 2009 and have lowered our fiscal 2009 forecast by 20 per cent reflecting cost and competition concerns," Merrill analysts Kevin O'Connor and Nicholas Robison said.
The news was enough to send Qantas shares below the $5 mark today, down more than 5 per cent to a low of $4.85 this afternoon.
The stock is trading at its lowest levels since a private equity bid was launched for the airline in December 2006.
The analysts said Qantas faced rising competition with new airlines entering its domestic and international markets, which is expected to put ticket prices under pressure.
"We think the greatest competitive threat is on international routes where competitors have a cost advantage and where Qantas's dominant domestic market position is less relevant."
However, on the domestic front, budget carrier Tiger Airways and Lion Air, the Indonesian carrier which is setting up a joint venture with Brisbane-based SkyAirWorld, are expected to have little impact.
"If we look at the two new entrants for the domestic market, we think there is a real chance that Lion Air's plan may not come to fruition.
"We think Tiger Airways will have some impact but that it poses little threat on the key trunk routes to/from Sydney, Melbourne, Brisbane, Perth and Adelaide."
In regards to cost pressures, the analysts said the airline was facing rising labour costs and capital equipment costs.
"Two of Qantas's main unions are asking for wage increases of five per cent and 10 per cent.
"We estimate that a one per cent increase in unit labour costs reduces Qantas's net profit after tax (NPAT) by $24 million," they said.
"Given the tight labour market, they may get much of what they are requesting."
Citigroup, which kept its "buy" rating on the stock, says strength in domestic demand, continued growth in Jetstar International and potential restructure options are expected provide real scope for continued growth and market support for Qantas.
Goldman Sachs JBWere also has a "buy" rating on the stock.
Qantas upgraded its guidance in December, saying it expects to achieve a 40 per cent boost in pre-tax profit this financial year, eclipsing an earlier forecast that net profit would be around 30 per cent higher than the previous financial year's result of $1.03 billion.
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January 15, 2008 - 4:45PMQantas (http://markets.smh.com.au/apps/qt/quote.ac?code=qan) has received a broker downgrade to "sell" from "neutral" on the view that the airline could face headwinds in fiscal 2009.
Two other brokers, however, have maintained "buy" ratings on the stock.
Merrill Lynch, which downgraded the stock, kept its fiscal 2008 forecast unchanged, saying it still expects the national carrier to beat its current guidance of 40 per cent earnings growth.
But the company said it expects Qantas's earnings to decline in fiscal 2009.
"We expect earnings growth to turn negative late in calendar 2009 and have lowered our fiscal 2009 forecast by 20 per cent reflecting cost and competition concerns," Merrill analysts Kevin O'Connor and Nicholas Robison said.
The news was enough to send Qantas shares below the $5 mark today, down more than 5 per cent to a low of $4.85 this afternoon.
The stock is trading at its lowest levels since a private equity bid was launched for the airline in December 2006.
The analysts said Qantas faced rising competition with new airlines entering its domestic and international markets, which is expected to put ticket prices under pressure.
"We think the greatest competitive threat is on international routes where competitors have a cost advantage and where Qantas's dominant domestic market position is less relevant."
However, on the domestic front, budget carrier Tiger Airways and Lion Air, the Indonesian carrier which is setting up a joint venture with Brisbane-based SkyAirWorld, are expected to have little impact.
"If we look at the two new entrants for the domestic market, we think there is a real chance that Lion Air's plan may not come to fruition.
"We think Tiger Airways will have some impact but that it poses little threat on the key trunk routes to/from Sydney, Melbourne, Brisbane, Perth and Adelaide."
In regards to cost pressures, the analysts said the airline was facing rising labour costs and capital equipment costs.
"Two of Qantas's main unions are asking for wage increases of five per cent and 10 per cent.
"We estimate that a one per cent increase in unit labour costs reduces Qantas's net profit after tax (NPAT) by $24 million," they said.
"Given the tight labour market, they may get much of what they are requesting."
Citigroup, which kept its "buy" rating on the stock, says strength in domestic demand, continued growth in Jetstar International and potential restructure options are expected provide real scope for continued growth and market support for Qantas.
Goldman Sachs JBWere also has a "buy" rating on the stock.
Qantas upgraded its guidance in December, saying it expects to achieve a 40 per cent boost in pre-tax profit this financial year, eclipsing an earlier forecast that net profit would be around 30 per cent higher than the previous financial year's result of $1.03 billion.