Virgin Blue’s earnings outlook nosedives
A report by Steve Creedy in The Australian says that UBS has slashed its profit forecasts for Virgin Blue by up to 22 per cent because it believes earnings will be dragged down this year by increased domestic capacity and start-up costs for its long-haul and New Zealand operations.
UBS analyst Simon Mitchell has downgraded Virgin’s rating from buy to neutral and reduced his valuation of the airline’s shares from $2.80 to $2.20.
The forecast reduction to 22 per cent would see Virgin’s net income at $210 million in 2008-09, compared with an estimated $218 million at the end of this financial year.
“There are a number of factors working against Virgin earnings that have not been been fully reflected in consensus numbers,” Mr Mitchell said in a note.
“Our new forecasts put the stock on 10 times FY09 earnings per share, which we see as close to fair value, given the flat earnings outlook for FY08 and FY09 and the risks of new investment.”
UBS expects Virgin’s yield growth to slow because the strong Australian dollar is pushing leisure traffic offshore and because of the airline’s plan to boost capacity by 15 per cent over the next 18 months.
It cited as factors the airline’s currency hedging and the start-up costs associated with its New Zealand and long-haul operations as well as the introduction of a fleet of Embraer regional jets. It estimated the cost of the new project to be about $30 million but said this could reach $40 million. Mr Mitchell said he believed Virgin’s earnings would be flat for two years and this reinforced his view that a private buyer of Toll Industries’ 63 per cent stake was the most logical outcome.
Virgin is not the only airline to add capacity, with Jetstar and Qantas also putting on more and new entrant Tiger Airways suggesting it will do likewise.
Tiger announced last month that it was looking for a second hub and indicated this would mean adding aircraft to its start-up fleet of five Airbus A320s.
It starts services to Adelaide today, launching the flights with 16,500 tickets starting at $19.95 one way. Adelaide is the ninth destination added to Tiger’s network since it started operations on November 23.
It plans to launch flights to Hobart and Newcastle from next week with services to Alice Springs and Canberra following in coming months.
Tiger spokesman Matt Hobbs said yesterday that the Hobart and Newcastle services would allow the airline to boost utilisation of its fourth plane, with the fifth aircraft due to arrive early this year.
He said loads had been good across the system and the airline had sold almost 50,000 seats on the Adelaide route today.
“It’s a double daily route. It hasn’t even started and we’ve already sold 50,000 seats,” he said. “All the other routes are going really well, we’re very happy with them, and obviously we’ll be watching with interest what our competitors do tomorrow and into the future.”
A Report by The Mole from The Australian
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