'Downside is less severe': Why some brokers are still bullish on the Qantas share price

This airline could see its shares fly higher.

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Key points

  • The Qantas share price has been suffering in recent weeks
  • The decline may have been due to market worries about inflation and rising interest rates
  • UBS rates the ASX airline share as a buy, with a price target of $6.55

One leading broker thinks that the Qantas Airways Limited (ASX: QAN) share price could rise strongly in FY23.

Despite the worst of the COVID-19 impacts fading into the distance for Qantas, the ASX airline share is still seeing elevated volatility. Over the past two months, the Qantas share price is down around 15%.

Qantas has experienced some difficulties in servicing pre-COVID levels of demand as its planes get back in the sky again.

According to reporting by The Age, Citi analyst Samuel Seow has said Qantas needs to improve its performance amid its ongoing operational problems. However, employing more staff will come at a higher cost.

But, despite these issues, some experts think that Qantas shares are an opportunity.

UBS is optimistic about the Qantas share price

One broker that particularly likes the ASX airline share is UBS.

According to reporting by The Australian, UBS rates Qantas as a buy, with a price target of $6.55. That implies a possible rise of around 40% over the next 12 months.

The broker noted the Qantas share price has dropped in recent weeks. UBS suggested the decline was largely because investors may be worried about what an economic downturn could do to the airline as a result of inflation as well as higher interest rates.

UBS suggested that the airline may well underperform in a recession. But, UBS said:

However if, as we expect, a less severe 'soft landing' macro scenario plays out for Australia, then QAN offers strong valuation upside and on the balance of probabilities we see QAN as compelling at its current price.

We think the downside is less severe because we expect Qantas earnings to be more resilient under a downturn scenario today versus previous cycles.

This view is based on the different trading context – pent-up demand, time to adapt, less intense competition – and a different-looking Qantas itself – lower fixed costs, more capex flexibility, higher mix of income from loyalty – such that Qantas' strategy is more likely to match capacity with demand to sustain profitable fares and loads, rather than grow aggressively and discount fares to fill seats.

Valuation

UBS estimates suggest that Qantas is going to return to profitability in FY23.

If the ASX share is able to generate the expected earnings, then it is valued at 15 times the projected earnings for the 2023 financial year.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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