The airline we like to think of as our national carrier, Qantas Airways Ltd (ASX: QAN), updated the market last week, saying trading conditions were "strong", but also added a number of caveats to that outlook.
The company, led by new Chief Executive Officer Vanessa Hudson, said capacity for the quarter was up 5% compared to the previous corresponding period and was likely to come in 4% higher for the remainder of the financial year.
But while this was a positive, Qantas said that "geopolitical events continue to create fuel price volatility with jet refining margins remaining elevated''.
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Shares looking cheap
The team at Jarden have run the ruler over the Qantas numbers for the first quarter, and while they see further share price upside from the current level of $9.51, they have trimmed their price target for the shares marginally.
The Jarden analysts said in a note to their clients that "the group domestic demand profile remains mixed'' with Qantas expecting to deliver at the lower end of its guidance of 3% to 5% growth for that business unit.
The Jarden team went on to say:
We see the modest group domestic capacity shaping as evidence of rationality in the Australian domestic market, but expect should a higher operating cost environment be maintained that some of this is recovered via yield management, in line with historical strategies.
The Jarden team said they expect Qantas' core earnings per share to be lower than their previous forecasts, but "we still see a number of reasons for investors to remain positive on the outlook for Qantas''.
They said they believe Qantas has arguably its best Australian domestic structure in 20 years, "a quality balance sheet that can withstand the impending capex investment and distribution to shareholders ahead'', and that there was also the possibility for margin improvement from improving "fleet unit economics" across both Jetstar and Qantas.
They went on to say:
Considering this, we maintain our buy rating and lower our 12-month price target from $12.90 to $12.70, which aligns to our longer-term earnings revisions.
If the $12.70 price target were attained, and factoring in dividends, this would constitute a total shareholder return of 37%.
The Jarden team said there was the threat of higher fuel costs in the future, and they had lifted their own second-half fuel cost forecast to $2.48 billion from $2.46 billion.
Qantas shares have been trading lower since the company released its full-year results on August 28, with the stock down from levels greater than $12 around that time.
