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Stock: Virgin Blue Holdings

Stock code: VBA

Share Price: $0.30

Broker Sell Recommendations:

Novus Capital (11th April 2011, share price was $0.30 that day)

Broker Hold Recommendations:

Macquarie Private Wealth (11th April 2011, share price was $0.30 that day)

Chart

Chart: Share price over the year to 15/04/2011 versus ASX200 (XJO)

Are we going to witness the end of another budget airline that dared challenge Qantas? Qantas has seen off several rivals in recent years, including Ansett and Impulse (although Qantas “saw off” Impluse by buying the company and effectively rebadging it as Jetstar).

Investors can’t help but wonder if this is a case of deja vu. Increased competition from Impulse and from then new entrant Virgin were partly to blame for Ansett’s collapse, but it was a disastrous investment and mismanagement by Air NZ that put an end to the 66-year old company once and for all. And in an ominous sign, Air NZ has just increased its stake in Virgin Blue to 15%.

Virgin Blue’s share price has been in a tailspin since the beginning of 2008, when it was sitting at just under $2.00, at that point 10% below its December 2003 listing price of $2.25. Already down 30% from its record high of $2.78 in early 2007, the worst was yet to come for investors. Amid the GFC and a raft of profit downgrades in the first 6 months of 2008 VBA lost 75% of its value and has never recovered. This calendar year alone the share price has haemmoraged, dropping 30% since Jan 1 to be languishing at $0.30 – marginally above its record low of $0.28 recorded on 25th August last year – as at the close of trade on Friday.

Most of the 30% fall since January has occurred since the half yearly report and accounts were released to the market on 23rd February. Although Virgin Blue CEO John Borghetti tried to convince investors that it was “a very solid result” it seems they didn’t buy his rhetoric, with shares tumbling 10% over the next few days and 22% in the eight weeks since results were announced.

Company Description

Virgin Blue Holdings Limited (VBA) comprises Virgin Blue Direct Domestic (servicing Australia), Pacific Blue (NZ & Pacific Islands), and V Australia (Australia to the USA). Virgin Blue also offers packaged holidays under the brand Blue holidays.

Virgin was established in 1999 by Brett Godfrey and Rob Sherrard thanks to $10m from Sir Richard. Following in the footsteps of successful US and European low-cost carriers, it boldly took on a crowded Australian domestic marketplace that was controlled by Qantas, Ansett and Impluse. Less than two years later Qantas had gobbled up Impulse and rebadged it Jetstar, Ansett had crashed and burned following a disastrous alliance with Air NZ, and several planes had brought down the World Trade Centre and almost the entire airline industry with it.

In the wake of September 11, in March 2002 Patrick Corporation acquired a 50% stake in Virgin Group for $500m. In December 2003 VBA floated at $2.25 per share. Toll Holding’s subsequent takeover of Patrick gave it effective control of VBA, but in July 2008 – amid a tumbling share price – Toll decided to rid themselves of the holding by divesting its stake in Virgin through an in specie distribution to shareholders.

VBA’s advantages are that it has a modern fleet of planes, cheaper headquarters thanks to a Brisbane base, lower costs and administration by removing expensive and cumbersome additions such as meals and headsets, and a ticketless platform with 90+% of tickets sold online.

While VBA is itching to get a slice of the corporate pie, the majority of its customers are still leisure travellers on regional Australian routes. This means that it competes with not only Qantas and subsidiary Jetstar but also the regional players like Rex and Skywest.

Link to Company Stock Quote & Charts: Virgin Blue Holdings

Link to Recent Company News: Virgin Blue Holdings

Link to Company Investor Centre: Virgin Blue Holdings

Share Price Performance

Long-term shareholders who particpated in the float of Virgin Blue have not been rewarded for hanging on, in fact the only opportunity for a gain was in the months immediately post-float and in the booming equities market of 2007. Back in Dec 2003, a share in the float of VBA cost $2.25, or a 10,000 share holding was worth $22,500. Today, that holding has nosedived 87% to be worth a mere $3,000.

The chart below compares the performance of VBA (in blue) to the ASX/S&P 200 index, as well as to industry leader Qantas. As you can see over the past five years, VBA has consistently underperformed the underlying index. While Qantas has been far from a stellar performer, it has proven to be a far safer bet in an industry that has faced numerous hurdles over the past decade – from 9/11 to the GFC to the recent natural disasters in Queensland and abroad.

Chart

Chart: Share price over the five years to 15/04/2011 versus ASX200 (XJO) and Qantas (QAN)

Financials

Earnings

2011 is shaping up as yet another tough year for Virgin Blue, with the company expecting “challenging” conditions over the second half. Natural disasters and soaring fuel costs forced Virgin Blue Holdings Ltd to issue another earnings downgrade three weeks ago, its fourth in just 12 months. It announced that it expected to post a before tax loss for 2010/11 in a range between $30 million to $80 million assuming “no further significant increase in fuel prices and no material deterioration in the trading environment.” In more bad news for Virgin, oil prices have increased a further 10% since that announcement.

Whether at the high or low end of expectations, this is well below the $33.4 million pre-tax profit recorded in 2009/10.

The share price is already down 22% since the company announced its earnings results less than two months ago for the six months ending December 31, 2010. Net profit slumped 62% to $24 million, which was more than 10% below the market consensus of $27 million.

Revenue

Revenue has steadily increased by 10% p.a. over the past three years, with the half year to Dec 2010 showing a similar increase (11.8%), however there was also an increase in operating expenses of 14.6%.

Dividends

Virgin hasn’t paid a dividend since 2008 and with the way the business currently stands investors needn’t hold their breath – it’s unlikely that one will be paid anytime soon.

Link to company Earnings Report: Virgin Blue Half Year Earnings Report – Dec 31st, 2010

Key financials for the past three years

2008A2009A
2010A
Sales Revenue ($m)
2,3222,600
2,976
EBITDA ($m)
29165 291
EBIT ($m)
168(119)
87
Adjusted NPAT($m) 98(117) 18
Reported NPAT ($m)
98(160) 21
Price/Earnings 18.1 0 57.3
Dividend Yield (%)
4.3 0 0
Net Profit Margin (%)
4.2(4.5) 0.6
ROE (%)
10.6(20.2) 1.9
ROA ($)
4.4(1.6) 2.0
Net Debt/Equity (%)
95.3 225.9 104.3

 

Broker Recommendations

Brendan Fogarty from Alto Capital was warning investors in November 2010 when the share price was sitting at $0.425, as was Richard Batt from Shadforth Financial Group who had a sell on the stock way back in October 2009 when it was $0.55.

Sean Conlan, a stockbroker at Macquarie Private Wealth had a Sell on the stock in March 2009 but currently has a Hold recommendation on VBA. Conlan says: “We believe the number of recent earnings downgrades will make it hard for Virgin to outperform the market in the short term, yet further weakness in the share price looks limited given the airline is trading below book value.”

Meanwhile, Cleo Nanni from Novus Capital has a sell on Virgin. Nanni says: “The recent poor result left the share price at almost 12 month lows. A profit downgrade of between $30 million and $80 million is very significant. A share price retreat to last year’s lows of 28 cents is possible.”

But not all analysts are so bearish. According to broker consensus data, 3 brokers hold Buys on VBA, and 3 have Holds, with only 2 Sells. The highest 12 month price target is $0.46, and the lowest 12 month price target is $0.33. The average 12 month price target is $0.396.

Air New Zealand also upped its stake in the stock recently, from 14.19% to 14.99% – buying an additional 18 million shares.

Conclusion

Virgin is up against it with a shaky global economy, tough outlook, rising oil prices, ongoing profit downgrades and a rival experienced in seeing competitors off. While the company may not be done and dusted just yet and there could well be some solid gains to be made from a change in the outlook and a subsequent rally in the share price, nobody wants to be the last to jump ship and to be left holding worthless stock. There are better places to put your money.

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.