In our analysis of sold-off Aussie icons part 2 we look at Qantas and QBE Insurance.
Qantas sees sky-high growth in Asia
Qantas has not been in the good books with investors and staff recently and its share price has nosedived. Management’s hardline approach to unions – involving a costly grounding of 108 airplanes across 22 airports – was not good for its brand, its staff or for passengers stranded all over the world. Its shares have slumped by 43% this year and 70% over the past five years.
Nevertheless Qantas has a plan in mind and that’s Asia. It’s set on becoming a major airline in the region, and with this expansion in mind investors may be inclined to use any short-term weakness to hop board for the long haul. If Qantas does pull off its Asian strategy – involving two airlines in Asia including a Jetstar franchise in Japan – it’s market capitalisation should increase accordingly.
Already, Asia is the largest and fastest growing market in the world. Last year Beijing Capital International Airport overtook London Healthrow to become the second busiest airline in the world after Atlanta, with roughly 74 million travellers passing through its gates.
Analysts are licking their lips. As air travel booms, demand for aircraft, hotels, restaurants, retailers, even property will benefit.
Peter Harbison, executive chairman of CAPA Centre for Aviation in Sydney reportedly said: ‘What is happening is a once-in-history change. The numbers simply defy traditional forecasting.’ He notes that once the tightly regulated markets in Japan, China and South Korea start opening to foreign carriers, some 300 million more people will begin travelling between these countries, which is 20 times today’s numbers.
Qantas chief executive, Alan Joyce is set on establishing an ultra-premium airline in Kuala Lumpur or Singapore next year. Closer alliances with Asian carriers is a key facet in his Asian growth strategy, with possibilities of teeing up with Malaysian Airlines, and Hainan Airlines out of Hong Kong.
Asia has ‘massive untapped potential,’ said Joyce, at a company’s briefing to analysts in August. ‘The future will be about travel to and within Asia.”
However to get the Asian strategy off the ground, Qantas must first come to an agreement with the unions; just last week a binding arbitration was forced will three unions.
Brokers are bullish. BA-Merrill Lynch notes that although grounding the fleet was costly, it thinks the stock’s a solid buy. JP Morgan is of the same opinion, noting that Qantas is on track for a strong recovery next year. UBS, too, has a buy on Qantas. It thinks that the shift in power towards management will benefit the stock.
Investors must admit, if Qantas is performing satisfactorily now when the majority of airlines around the world are doing it tough, surely that bodes well for less turbulent times. This week American Airlines announced that it was filing for bankruptcy protection to cut costs and unload massive debt. Delta, Northwest, United and US Airways all went through bankruptcy proceedings in the last 10 years.
The risks for investors in Qantas is whether or not the Asian growth strategy not only works, but is also profitable. Airlines are notoriously risky, and are beholden to fuel prices, Government ‘security’ campaigns, currency movements, weather patterns and the rise of competition.
As well, Qantas faces the sting of $194 million in costs from the industrial action, sending its profit down roughly 66% to $140 million in the first half.
Management’s plans to launch into Asia, and profit from the burgeoning middle class, also hinges on growth forecasts of those countries. The OECD expects Southeast Asia’s six major economies to slow through 2016, as leading economies in Europe face the prospect of recession or even a depression. It expects growth in the Eurozone to stall next year, dropping to 0.2% from 1.6% this year, while US growth could slump to 0.3% next year from 1.7% this year.
On top of this, Qantas isn’t the only airline battling for a share in the lucrative Asian market.
QBE Insurance at mercy of stormy weather
Australia’s biggest insurer QBE Insurance’s share price has taken a battering – tumbling 21% over the past year and halving over the past five years – as large catastrophe claims from storms, cyclones, earthquakes and tornados sees it paying out more than usual.
Today its shares hover at $14, a far cry from $25 at the beginning of 2010 and the $35 it hit in 2007.
But QBE is still a favourite stock with brokers and fund managers alike. Aberdeen Australian Equities Fund continues to hold QBE for its diversification of product class and geography (QBE has made 75 acquisitions in the last 10 years across 50 countries); the company also has no holdings of sovereign debt issued by the peripheral European countries, a stable and experienced management team and a strong underwriting discipline.
The company’s failure to meet its full-year insurance profit margin of 15-18% – coming in at 11-14% instead, plus the fall in risk-free interest rates was a blow to shareholders.
Michael Heffernan at Austock has a sell on QBE. “This one time sharemarket favourite has recently fallen on hard times mostly due to the high number of natural disasters in the past year. Also, its investment strategy, relying very much on fixed interest, has been adversely impacted by particularly low global interest rates,” he notes.
QBE isn’t alone in bearing the brunt of a bad weather patterns. Insurers globally have been doing it tough.
QBE management, however, don’t seem too perturbed by share price weakness. Over August, two directors were acquiring shares in the stock. Management is also keen to use excess cash to make further acquisitions.
Cameron Bell from Intersuisse is upbeat, with a buy rating attached. Bell argues: “QBE offers strong management and an excellent business model based on conservatism. Volatile and weak global markets have restricted the share price recently, but it’s trading on a very cheap multiple and is paying a dividend yield above 9 per cent. The company has a sound balance sheet and generates very strong cash flow.”
The question for investors is whether QBE’s fortunes are short-term, or not. Global catastrophic events are becoming more the norm than the exception as our environment deteriorates. For climate sceptics this is clearly not something to worry yourself about, but for others – note this as a factor X when buying QBE shares for the long haul.
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