Qantas dives on Merrill’s sell call

A Report by Steve Creedy in the Australian says that investors yesterday wiped almost 4.5 per cent – or $450million – off the value of Qantas as a Merrill Lynch “sell” recommendation sent the share price plummeting below $5 for the first time since the launch of last year’s private equity bid.

Qantas plunged 23c to close at $4.90 – with more than 14million shares changing hands – after the analysts slashed their fiscal 2009 earnings estimate by 20 per cent to reflect  “cost and competition concerns”.

The drop came despite earnings guidance in December that the airline’s pre-tax profit would be 40 per cent higher than last year’s at about $1.4 billion.

Merrill analysts Kevin O’Connor and Nicholas Robinson still expect the carrier to beat its 40per cent earnings guidance for 2007-08. But they believe earnings growth will turn negative in calendar 2009 as the airline faces rising competition and falling fares as new carriers enter the flying kangaroo’s domestic and international markets.

“The greatest competitive threat is on international routes where competitors have a cost advantage and where Qantas’s dominant domestic market position is less relevant,” they said.

The analysts cited labour and capital equipment costs as areas of concern and noted that two Qantas unions were asking for wage rises of five to 10 per cent.

They estimated that a 1 per cent increase in unit labour costs reduced Qantas’s net profit after tax by $24 million.

Qantas chief financial officer Peter Gregg yesterday expressed surprise at the downgrade.

“We’re aware that there’s been some US selling as a lot of the funds over there try to liquefy some assets,” he said.

“That’s what we’ve seen for a few days now but there’s nothing underlying it. The business is performing very strongly.”

Mr Gregg conceded that investors could be nervous about fuel prices but said the airline was well covered until June, with some cover beyond that. He said a recent fuel surcharge rise had been a “catch-up”.

Qantas had been boosting hedging when oil prices dipped and would pick up more as it entered fiscal 2009.

“But we’ve hedging at prices we’ve never hedged at before,” he said, adding that Qantas had hedging at $US88-$US90 a barrel.

“Offsetting that has been the strength of the Aussie dollar.”

JP Morgan analyst Matt Crowe, who has a “neutral” rating on Qantas, said the Merrill downgrade was probably responsible for yesterday’s fall.

But he noted the airline’s shares had been falling for several weeks, partly because of the soft market and partly because investors were getting nervous.

“It’s not so much that the outlook for airlines has got hugely worse,” Mr Crowe said. “Airlines are stocks where a lot can go wrong and when people are looking at things that can go wrong they tend to focus on airlines.”

Mr Crowe said he thought the outlook for the Australian domestic market had deteriorated slightly and it was probably getting to its peak.

“Internationally, aviation is still incredibly strong,” he said.

The fall came as a US Federal Court accepted the airline’s plea deal with the US Department of Justice, including a $US61 million ($68.5 million) fine, for its part in a freight price-fixing scandal.

However, Qantas had already revealed details of the fine and it had been factored in to its share price by the market. 

A Report by The Mole