Are you on the hunt for some big returns? Well, if you are, then Qantas Airways Limited (ASX: QAN) shares could be worth a look.
Despite rising 9% since the start of the year, one leading broker believes the Flying Kangaroo's shares can still rise materially from current levels.
What is the broker saying about Qantas shares?
According to a recent note out of Goldman Sachs, its analysts feel the market is significantly undervaluing the airline operator's structurally stronger earnings.
These earnings are being underpinned by a material cost reduction initiative. Goldman explains:
In 2020, QAN announced a program to structurally reduce (irrespective of capacity) ex-fuel operating costs by >A$1bn by FY24. Notwithstanding inflation etc., this is a material initiative in the context of FY19a PBT of ~A$1.3bn. As of Jun23, QAN's three-year recovery plan (2020-2023) has been completed, delivering A$1b permanent cost benefits to the group. Importantly, further customer investment of A$230m in FY24 appears to be gaining traction with ongoing improvement in operational performance in FY24 to-date, precluding the need for acceleration in spend, which is the key downside risk to sustainability of earnings. […] Therefore, we still expect substantially higher earnings capacity due to i) operational performance improvements precluding the need for acceleration in spend and ii) A$1b cost-out program.
Despite this, the broker notes that Qantas shares are trading at an "excessive" discount to US peers. It adds:
QAN is trading at PE discount of 29% vs US+regional peers vs historical 5Y average discount of 14%. Given QAN's more conservative revenue profile, recent operational performance improvements, which implies that further investment in customer service would not be required, we believe that the discount is excessive.
Big returns
In light of the above, the broker has put a buy rating and $8.05 price target on Qantas' shares.
Based on its current share price of $5.84, this implies potential upside of approximately 38% for investors over the next 12 months.
It is also worth noting that the broker is expecting the Qantas dividend to return in FY 2025. It has pencilled in a 30 cents per share payout, which equates to a 5.1% dividend yield.
Commenting on its buy recommendation, the broker said:
. As a key beneficiary of the re-opening of the world post-COVID, we expect the airline's traffic capacity to return to 95% of pre-COVID levels by FY24e, with the airline's earnings capacity (EPS) expected to exceed that of pre-COVID levels by ~49%. We forecast a ~24% FY19-24e cumulative uplift in unit revenues (c. 4.4%pa), and ~50% drop-through of QAN's A$1bn+ structural cost-out program. QAN's current market capitalisation in line and enterprise value still 5% below pre-COVID levels. As such, we believe QAN is not priced for a generic recovery, let alone prospects for improved earnings capacity. We continue to see upside associated with substantially improved MT earnings capacity.
