Qantas Airways Ltd: Analysis and Valuation

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  • Topic: Airline, Qantas, Financial ratio
  • Pages : 17 (4967 words )
  • Download(s) : 313
  • Published : October 5, 2008
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TABLE OF CONTENTS

TOPICSPAGE NO.

1.0Executive Summary………………………………………………………3-4

2.0Objectives…………………………………………………………………..5

3.0Economic Analysis………………………………………………………..6-7

4.0Industry Analysis…………………………………………………………..8-10

5.0Company Profile..………………………………………………………….11

5.1Key Financial Ratios………………………………………………11-12

6.0Valuations………..…………………………………………………………15

6.1Dividend Valuation Model…………………………………………14-16 6.2Price-Earnings(P/E) Model.………………………………………..17

7.0Limitations……………………………………………………………………18

8.0Conclusions and Recommendations……………………………………...19

5.0 List of References……………………………………………………………20-22

APPENDIX

1Qantas Airways Ltd – Key Facts…….………………………………….23-24 2 Ratio Calculations………………………………………………………. 25 3 Technical Analysis………..…..………………………………………….26-27

1.0 EXECUTIVE SUMMARY

This report tries to analyse and value the share of Qantas Airways limited from the perspective of a potential investor. The report has used share valuation techniques to put a value on the share of the company and recommends whether a potential investor should invest in the company at the prevailing market price or not. The report doesn’t directly suggesting an existing investor’s about offloading his/her investment in the company or keep sticking to it.

The report has employed top-down approach to share valuation – it starts with economic analysis, proceeds to industry analysis and finishes at fundamental or company analysis followed by the limitations of the analysis and recommendations. Economic analysis is suggestive of a slowing down in the Australian economy due to rising inflation and food prices. Interest rates are expected to stay the same in the current year amid fears of serious economic slump. Overall, Australian economy is still well placed as compared to its western counterparts and is expected to be resilient on the back of commodities export to China and India.

Australian air transport industry has been fiercely competing after the advent of so called budget airlines and the deregulation which started in early 1990s. Qantas is still the leading player but is facing intense competition from Virgin Blue on the domestic front and Air New Zealand, Emirates and Singaporean Airlines. The competition is expected to further escalate and would result in an increasing number of people travelling by air than the conventional modes of transport.

The report has employed dividend valuation model and price-earnings approach to the valuation. Dividend valuation model’s constant growth version has been used in the report whereas simple P/E multiples approach has been used to add credibility to the dividend valuation model’s results. For dividend valuation model, we have used the historical financial data from the company’s annual reports for 2005, 2006 and 2007. Capital Asset Pricing Model (CAPM) has been employed to calculate the expected rate of return of the company which is then used in constant growth dividend model to calculate the intrinsic value and ascertain whether the share is overvalued or undervalued in the market.

Fundamental analysis suggests that the company is one of the top brands of Australia and is facing an intense competition from the low cost carriers like Virgin Blue and Tiger Airways. It has tried to compete with these budget airlines in their own territory by establishing a low cost carrier subsidiary JetStar. The company has been over reliant on debt and has taken on high financial risk in order to produce good results for the shareholders and it might be in trouble if it is unable to maintain its strategic advantage over the rivals.

Based on our analysis, we have concluded that the company’s share has been over valued by the market. Therefore, we recommend to risk-averse investors to stay away from company as long as it’s market price is above the intrinsic value calculated by us.

2.0 OBJECTIVES

The...
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