The Qantas Airways Ltd (ASX: QAN) share price has experienced its fair share of pain in the pandemic-affected years since December 2019.
Even as the travel sector continues to recover, the past 12 months have been bumpy for the airline ,with the Qantas share price down 8.5% since August last year. But one fund manager thinks the ASX S&P/ASX 200 Index (ASX: XJO) share is trading too cheaply.
Opportunities
Fund manager L1 Capital believes there are plenty of positives about Qantas, which recently reduced the remuneration that it was going to pay former CEO Alan Joyce.
According to the fund manager, there are "numerous opportunities in low P/E, highly cash generative companies where valuations remain compelling". Qantas is one that appears to tick the boxes.
L1 Capital noted the Qantas share price rose 10% in July, with limited news flow over the month other than regional airline Regional Express Holdings Ltd (ASX: REX) entering voluntary administration.
However, the fund manager thinks that Qantas shares remain "very well placed over the medium term" for several different reasons.
Loyalty division
L1 believes the airline has Australia's best loyalty division, and it's expected to double earnings over the next five to seven years.
It called the segment a "high-growth, capital-light loyalty division, which remains incredibly underappreciated by the market."
Qantas expects that improvements to its frequent flyer program can help it grow its underlying earnings before interest and tax (EBIT) to between $800 million and $1 billion by FY30.
Other positives
L1 also believes Qantas has sufficient balance sheet capacity to continue buying back shares and recommencing the payment of fully franked dividends next year.
With the strength of its balance sheet, it's able to fund a "raft of brand new, more fuel-efficient aircraft to be delivered along with Project Sunrise, which will enable direct flights from Melbourne/Sydney to London and New York from 2026".
And after all of Qantas's mistakes during COVID-19 (and since), the airline's CEO Vanessa Hudson is "rapidly and methodically addressing customer 'pain points', which should improve sentiment from both customers and potential investors."
According to the fund manager's forecasts, the Qantas share price trades at an FY25 price/earnings (P/E) ratio of only around six, despite its "leading industry position" and growing loyalty division.
Market capitalisation snapshot
According to the ASX, the Qantas market capitalisation is around $9.5 billion. That comes after the Qantas share price has dropped 8.5% in the last 12 months, though it's up 10.8% in 2024 to date.
