Top Gainer: Virgin Blue (VBA)

 Closing price  $0.27
 Change  +0.035
 % change  +14.9%


Although Virgin Blue reported a net loss of $68 million that was almost 20% higher than the consensus estimate of $57 million, shares surged in the second half of the day to close 14.9% higher to be the day’s top gainer. Go figure. Right up until midday shares were only half a cent higher, but some large trades after lunch sent the share price soaring. However there’s still some way to go to make up the fall over the last month, with the share price plunging 25% since the end of July and 50% since the beginning of this year.

The rot started well before this year, with VBA’s share price in a tailspin since the beginning of 2008, when it was sitting at just under $2.00, 10% below its December 2003 listing price of $2.25. Although at that point it was 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. It has pushed even lower since then to sit at an all-time low of just 23 cents earlier this week.

Most of the 50% tumble 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 after results were announced.

Whether they buy his latest comments remains to be seen. On Thursday VBA’s CEO John Borghetti said that he expects an improvement in financial performance in 2012. “There are early indications of improving earnings in financial year 2012, with positive trading results in July and continued strengthening in the government and corporate markets,” Borghetti said. “We are confident we have the right strategy to manage our response to changes in future market conditions and to ensure a stable and successful future for Virgin Australia.”

It’s little wonder the share price has dropped out of the sky – the company’s net loss of $67.8 million for the 12 months to June 30 was three times last year’s $21.3 million loss even though revenue increased 9.8 per cent to $3.27 billion.

Mr Borghetti said Virgin’s corporate and government market revenues had risen 29 per cent, year-on-year, and he expected further gains in the current year as the airline group continued to roll out new products. “This important segment now makes up 13 per cent of our total revenue, up from 10 per cent in the 2010 financial year,” Mr Borghetti said, adding that there were further gains recorded in July. Since June 30, Mr Borghetti said Virgin had added Optus, Leighton and Spotless among its corporate customers.

The airline group has pitched for more corporate travellers this past year through new aircraft, a new business class and new airport lounges although VBA has made almost no headway into Qantas’s market dominance – Qantas on Wednesday said it had renewed 99.5 per cent of its corporate contracts.

What’s more, Virgin is targeting capacity growth of between four and six per cent in the first half of 2011/12, well below Qantas’s flagged eight per cent growth in the first half. VBA also declined to provide specific earnings guidance for the current year, citing the uncertain economic environment.

However Morningstar analyst Nachiket Moghe said the results showed the airline’s strategy was working, and predicted more gains in the year ahead. “I think there’s a lot of low-hanging fruit that can be picked by Virgin,” he said. “They have proven that they can do it.”

Shawn Uldridge from William Shaw Securities says that troubles at Tiger Airways open the door for Virgin and Qantas to raise domestic airfares. “I would otherwise rate Qantas and Virgin as sells due to my view of higher long-term oil prices, but this development actually enables much more wriggle room,” he says. “VBA is a hold at these levels.”

Meanwhile Intersuisse’s Cameron Bell has a sell on VBA, saying that the airline has experienced a tough run recently and that he doesn’t expect things to improve anytime soon. “Competitively, it’s struggling against Jetstar and even Qantas…the sector remains under pressure given the lacklustre domestic travel market and high oil prices.”

All in all, 2011 is shaping up as yet another tough year for Virgin Blue, with the company expecting “challenging” conditions ahead.

But not all analysts are bearish. According to Reuters broker consensus data, three brokers hold Buys on VBA, four have Outpeforms and five have Holds, with just one Sell.


Chart: Share price over the year to 25/08/2011 versus ASX200 (XJO)

Stock code: VBA

Charts: Virgin Blue Australia Limited

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