MENU

Why Virgin Australia Holdings Ltd shares just took off

The Virgin Australia Holdings Ltd (ASX: VAH) share price gained about 11.4% on Wednesday’s trade to close at 22 cents as investors mulled over the prospects of the airline going private amid some positive results announced by the company.

Virgin Chairman Elizabeth Bryan told shareholders that while the board had held discussions about the prospect of privatisation there was “no outcome” to report to the market.

But she did have some good news to offer long-suffering shareholders at the company’s AGM.

Virgin managed to report a positive free cash flow result of $34.3 million for financial year (FY) 2017 for the first time since FY 2012.

That figure represents an increase of $126.4 million on FY 2016.

Virgin also managed to reduce debt by $839 million, bringing the net debt figure for FY 2017 to about $1.04 billion.

But the airline reported an underlying loss before tax of $3.7 million for FY 2017, down $47.4 million on the profit of $41 million recorded by Virgin for FY 2016.

Virgin CEO John Borghetti said the “positive trajectory” has continued into FY 2018.

In the first quarter of FY 2018, Virgin recorded an underlying profit before tax of about $18 million compared to the first quarter of FY 2017 in which it reported an underlying loss of $3.6 million.

Virgin’s revenue increased by 5.7% on the prior corresponding quarter, according to the company.

Free cash and leverage will continue to be a key focus for Virgin and Mr Borghetti said the airline is on track to register improvements in those areas for FY 2018.

“This is notwithstanding the delivery of five new Boeing 737-NG aircraft, four of which will deliver in the first half,” Mr Borghetti said.

“The Group is working towards delivering these free cash and leverage improvements through continued disciplined capacity management, stronger earnings and ongoing strict capital management.”

Mr Borghetti said the airline will also continue to look for opportunities to expand in the lucrative Chinese market.

It seems the prospect of privatisation helped spark investor interest and suggests that some believe Virgin stock is undervalued.

The Virgin share price has tumbled from around $1.80 where it was trading at about 10 years ago as the airline has struggled through a turbulent period, while Qantas Airways Limited (ASX:QAN) has recently made a recovery.

As such, it seems some shareholders are looking to recoup some of their losses and see privatisation as a feasible option.

The prospective process of privatisation could involve Virgin buying back shares on the market, an outside purchaser stepping in, or an existing shareholder stepping up.

China’s Nanshan Group, Singapore Airlines Ltd, Etihad Airways, HNA Aviation and Virgin Group are the company’s biggest shareholders.

If privatisation goes ahead, some shareholders could enjoy significant gains.

But Ms Bryan wasn’t giving away too much.

“The Group has a small free float and many have asked the question of whether it is appropriate to remain listed, or to become a privately held company,” Ms Bryan said.

“As an independent chair with a large and varied shareholder base, I am particularly conscious of what a small free float means for our minority shareholders.”

Whether or not privatisation goes ahead, it seems the idea of privatisation being kicked around as an option has already provided shareholders with a significant boost.

OUR #1 dividend pick to grow your wealth over the new financial year is revealed for FREE here!

Financial year 2018 is here and The Motley Fool's dividend detective Andrew Page has revealed his must buy dividend share to grow your wealth in 2018.

You might not know this market leader, but it's making waves in Asia and already boasts a term-deposit-crushing dividend above 4%. A debt free balance sheet and dominant market position at home and abroad mean this company offers investors income and some real-deal growth potential...

Simply click here to grab your FREE copy of this up-to-the-minute research report on this rising star right now.

Motley Fool contributor Steve Holland has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.  

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.