Valuecruncher’s mid-point valuation for Qantas is $4.27 per share, with a range between $2.54 and $6.10. The current share price of $5.20 falls within the higher end of the Valuecruncher range.
Revenue growth has been declining since 2004 with growth being 10.66% in the 04/05 period and 8.61% in the 05/06 period. We have forecasted growth to be 8%, 7%, and 6% for the next three periods, heading towards terminal growth of 3%.
EBIT margins have also been falling since 2004 (9.67%, 8.07%, and 5.32% for 04, 05, and 06, respectively). The projected EBIT margins are 5% for 07 and 08, and 7% in 09. This follows forecasts made in the 2006 Qantas Annual Report, stating that EBIT margins are unlikely to improve in the next two years due to rising fuel costs, but as more efficient operating strategies are put in place, an improvement in margins may be seen after the next two years.
Discount Rate (WACC)
The discount rate used in the analysis is 10.5%, the cost of capital stated in Qantas’ Annual Report.
The Qantas share price has recently jumped up to around $5.00 due to an announcement of a possible buyout by Macquarie Bank and Texas Pacific Group, a private equity firm (from a share price pre-announcement of ~$4.20). The mid-point valuation calculated by Valuecruncher is based on Qantas’ current business plan, and is in line with the value of the shares pre-announcement. Analysts have suggested that Qantas should be looking to fetch over $5.50 per share in the event of a buyout. Valuecruncher will watch with interest if details of how additional value will be created by the buy-out group are released. Texas Pacific Group has a track record of success with airlines (not many can claim that) and what a higher value business plan for Qantas might look like has ramifications for airlines across the globe, but especially Air New Zealand.