Financial Analysis Of Qantas Airways Ltd For Investment Portfolio

Company Description

The report is developed for the purpose of facilitating the decision-making process of investors seeking to invest in a company listed on ASX. The company selected in this regards is Qantas Airways Ltd. The financial analysis is carried out for proving an insight into the present and future growth prospects of the company. This will help in developing a solid base to the investors for guiding their decision-making process related to investment. The financial performance is carried out with the help of performance ratios that assesses the liquidity, solvency, and profitability and market conditions of the company. Also, the report has calculated the weighted verge cost of capital for analyzing the capital structure effectiveness of the company. The debt ratios will provide an analysis relating to the use of debt by the company for financing its business operations. The impact of market volatility on the price of its securities is determined by the use of beta factor with the use of CAPM model. Also, the dividend policy of the company is described to gain an analysis of its capability to create value for the shareholders. At last, the letter of recommendations is developed for client to facilitate the investment related decisions in support of the overall analysis carried out.

Qantas Airways, a flag carrier and largest airline of Australia established in the year 1920 and operates both domestic and international airline. It is involved in carrying out both the operations including domestic and international air transportation services. The airline after its establishment has grown into one of the major long distance airline and recognized brands within Australia. The airline has developed its reputation by gaining excellence in safety, operational reliability, engineering, and maintenance and customer service. The main business operations of the airline includes providing world class transportation services with its two brands, that are, Qantas and Jetstar. It also carries out subsidiary businesses that include operations in specialist markets such as Q Catering. The airline provides employment to about 30,000 people and the majority of them constitute the local workforce. The company aims to achieve the position of best airline in the world by carrying out its operations in a sustainable manner. The business strategy of the company is to accomplish its aims and objectives by placing emphasis on safety, sustainable operations, strong reputation and environmental responsibility (Qantas Airways Ltd, 2018).

Major Shareholders

The major shareholders of the airline having more than 5% and 20% of the shareholdings are HSBC Custody Nominees Ltd (40.21%), JP Morgan Nominees Australia Limited (17.93%) and Citicorp Nominees Pty Ltd (9.19%). The airline is classified as a non-family company as its shareholders does not have any role in its ownership and governance structure.

Ownership-Governance Structure

Major People Involved in Firm Governance

The Chairman

Leigh Clifford is the chairman of the company appointed in the year 2007 and is responsible for over-viewing the roles and responsibilities of the Board.

The Board Members

Name of Board Members	Job Position
Leigh Clifford	Chairman and independent non-executive director
Alan Joyce	Chief Executive Officer
Maxine Brenner	Independent non-executive director
Richard Goodmanson	Independent non-executive director
Richard Goyder	Independent non-executive director
Jacqueline Hey	Independent non-executive director
Belinda Hutchinson	Independent non-executive director
Michael L’Estrange	Independent non-executive director
William Meaney	Independent non-executive director
Paul Rayner	Independent non-executive director
Todd Sampson	Independent non-executive director
Barbara Ward	Independent non-executive director

Alan Joycee is appointed as the Chief Executive Officer of the airline since the year 2008.

The major shareholders of the company do not have any role in the ownership and governance structure.Therefore, it can be said that the company is a non-family company as the shareholders does not have role in the decision-making and this improves the transparency and reliability of the business outcomes (Qantas Annual Report 2017, 2017).

In order to calculate the financial ratios of Qantas Airways for last two years, the annual report of year 2017 has been taken from the investors section of company to extract the financial date for year 2016 and 2017.

Financial data and fundamental ratio of Qantas Airways has been presented in the below table:

Financial Data used to calculate the financial ratio
Qantas Airways
Amount in $ million
Financial Items	2016	2017
Current Assets	$    3,458.00	$    3,119.00
Current Liabilities	$    7,028.00	$    7,095.00
Inventories	$        336.00	$        351.00
Quick Assets	$    3,122.00	$    2,768.00
Long Term Debt	$    6,422.00	$    6,589.00
Shareholders’ Equity	$    3,255.00	$    3,537.00
Total Assets	$  16,705.00	$  17,221.00
Interest Paid	$        284.00	$        235.00
EBIT	$    1,640.00	$    1,559.00
Account Receivable	$        795.00	$        784.00
Net Profit	$    1,029.00	$        852.00
Net Revenue (Credit Sales)	$  15,784.00	$  15,680.00
Weighted Average number of ordinary shares (in millions)	2083.00	1853.00
Cost of Goods Sold	$    6,612.00	$    6,475.00
Dividend paid	$                 –	$        254.00

(Source: Annual Report 2017: Qantas Airways)

Financial Ratios	Formulas	2016	2017
Short term solvency
Current ratio	Current Assets/Current Liabilities	0.49	0.44
Quick ratio	Quick Assets/Current Liabilities	0.44	0.39
Long term solvency
Debt Ratio	Long Term Debt/Total Assets	0.38	0.38
Debt to Equity Ratio	Long Term Debt/ Shareholders Equity	1.97	1.86
Times interest earned ratio	EBIT/Interest Expenses	2.06	6.63
Asset utilization
Inventory Turnover Ratio	Cost of Goods Sold/Inventory	19.68	18.45
Total Asset turnover ratio	Net Revenue/Total assets	0.94	0.91
Account Receivable Turnover ratio	Credit Sales/Account Receivable	19.85	20.00
Profitability Ratios
Net Margin Ratio	Net profit/Net Revenue	6.52%	5.43%
Return on total assets	Net profit/Total Assets	6.16%	4.95%
Return on ordinary shareholders’ equity	Net profit/Shareholder’s Equity	31.61%	24.09%
Market Value Ratios
Earnings Per Share	Net profit/weighted average number of shares	$            0.49	$            0.46
Dividend Per Share	Dividend/weighted average number of shares (Lumby and Jones, 2007)	$                 –	$            0.14

(Sources: Annual Report 2017: Qantas Airways and Morning Star 2017: Qantas Airways)

Chart showing the price movement of Qantas Airways against the price movement of All Ordinaries during the last two years

Monthly data from 1 Jan 2016 to 31 Dec 2017
Date	Qantas Airways	All Ordinaries
Monthly	Share Price	Index Price	Scale to 100
1	31/01/2016	3.57	4947.90	49.48
2	29/02/2016	3.77	5151.80	51.52
3	31/03/2016	2.98	5316.00	53.16
4	30/04/2016	2.85	5447.80	54.48
5	31/05/2016	2.61	5310.40	53.10
6	30/06/2016	2.92	5644.00	56.44
7	31/07/2016	3.00	5529.40	55.29
8	31/08/2016	2.89	5525.20	55.25
9	30/09/2016	2.92	5402.40	54.02
10	31/10/2016	3.15	5502.40	55.02
11	30/11/2016	3.18	5719.10	57.19
12	31/12/2016	3.25	5675.00	56.75
13	31/01/2017	3.58	5761.00	57.61
14	28/02/2017	3.71	5903.80	59.04
15	31/03/2017	4.14	5947.60	59.48
16	30/04/2017	4.89	5761.30	57.61
17	31/05/2017	5.58	5764.00	57.64
18	30/06/2017	5.19	5773.90	57.74
19	31/07/2017	5.58	5776.30	57.76
20	31/08/2017	5.69	5744.90	57.45
21	30/09/2017	6.08	5976.40	59.76
22	31/10/2017	5.60	6057.20	60.57
23	30/11/2017	4.98	6167.30	61.67
24	31/12/2017	5.21	6146.50	61.47

(Source: Yahoo Finance, 2018: Qantas Airways and Yahoo Finance, 2018: All Ordinaries)

(Madura, 2014)

Report based on the comparison in the movement in stock price (Qantas Airways) and Index prices (All Ordinaries)

On the basis of above it can be clearly said that there share price moves in the same direction as the price of index moves. In short it can be said that there is positive correlation between share price (Qantas Airways) and index price (All Ordinaries). In order to find out the exact correlation between shares price of Qantas Airways and Index price of All Ordinaries help of excel has been taken and it has been found that there is positive correlation of 0.64 between them. It means when the price of index move by $ 1 than price of Qantas move by $ 0.64. So, in short it can be understood that when index rises the price of Qantas will also rise and when the price of index fall the price of Qantas will also falls (Moles and Kidwekk, 2011).

In order to find volatility between the All Ordinaries and Qantas Airways it is important to compute the standard deviation and coefficient of variation of stock as well as of index. Below table shows the calculation of standard deviation and coefficient of variation of both Qantas Airways and All Ordinaries.

Test of Volatility
Monthly	Qantas Airways	All Ordinaries
Date	Stock Return	Index Return
31/01/2016	5.44%	4.12%
29/02/2016	-20.88%	3.19%
31/03/2016	-4.35%	2.48%
30/04/2016	-8.44%	-2.52%
31/05/2016	12.06%	6.28%
30/06/2016	2.53%	-2.03%
31/07/2016	-3.70%	-0.08%
31/08/2016	1.06%	-2.22%
30/09/2016	7.84%	1.85%
31/10/2016	0.91%	3.94%
30/11/2016	2.40%	-0.77%
31/12/2016	9.97%	1.52%
31/01/2017	3.73%	2.48%
28/02/2017	11.53%	0.74%
31/03/2017	18.16%	-3.13%
30/04/2017	14.17%	0.05%
31/05/2017	-6.99%	0.17%
30/06/2017	7.52%	0.04%
31/07/2017	1.92%	-0.54%
31/08/2017	6.81%	4.03%
30/09/2017	-7.80%	1.35%
31/10/2017	-11.11%	1.82%
30/11/2017	4.56%	-0.34%
Standard Deviation or Volatility	0.091	0.024
Average Mean	2.06%	0.97%
Coefficient of variation	4.43	2.46

Fundamental Ratio Calculation

Standard deviation helps to measure the volatility of any stock but it standard deviation alone cannot provide best estimation for measuring the volatility. So it is important to compute the coefficient of variation as it helps to measure the volatility in the stock returns. If coefficient of variation of any stock is more than 1 it means that stock is highly volatile. On the other hand if any stock has coefficient of variation less than 1 it means it is relatively less volatile. Looking at the above table it can be said that there exists very high volatility in both stock returns and index returns as coefficient of variation of both is greater than 1 (Reilly and Brown, 2011).

Expansion of Business Services

Qantas at present is emphasizing mainly on strengthening its international network for adequately meeting the needs and demands of customers. The changes are made to make the best use of fleet and appropriately meeting the demand of the customers by placing right aircraft at right route and right time.

Launching of New Technology Platform

Qantas has launched a new technology platform for improving the customer service by delivering them efficient services such as airline retailing, booking and servicing capabilities and thus providing them high quality services. The quality distribution platform adopted by the airline aims to enhance the functionality and efficiency of indirect agent channels and thus facilitating the trade partners to easily sell the products and service provided to Qantas.

Establishment of New Pilot Academy

The Qantas group has also made announcement in relation to the selection of its location for establishment of its new pilot academy. The academy is aimed to be established in the year 2019 for meeting the needs of skilled aviators and thereby improving the quality of products and services delivered by the airline to the customers.

Qantas emphasizing on introduction of more entertainment services

Qantas is also making major announcements in relation to expanding its entertainment offering for providing more relax to the customers during the flight time. In this context, the airline has also signed up the contract with the Apple Music and Audible and also extended its partnership with Stan for providing free access to customer for viewing televisions, movies, songs and digital audio books.

Launching of Special Fares

Qantas is working in collaboration with the West Australian government for launching of special weekend fares. The strategy of the airline is specifically meant for improving the number of travelers to Broome. This will increase the customer base of the company and thus leading the airline to realize the economies of scale and meeting effectively the demand from leisure travelers (Qantas: News Room, 2018).

Significant Announcements

Estimation of Beta

Beta has been taken from the published source (Reuters) and it is estimated at 0.82 (Reuters, 2018)

Calculation of required rate of return using the CAPM model

Formula used in CAPM model is: Beta * Market risk + Risk free rate of return

Applying this formula we get required rate of return as under:

Required Rate of Return of Qantas Airways
Risk Free rate of Return (Given)	4%
Market risk premium (Given)	6%
Beta of company (Reuters)	0.82
Required Rate of Return	8.92%

 
Evaluation of Qantas Airways to known whether is good for the conservative investment

The conservative investment refers to the strategy where investors invest only in those stocks or securities that helps in preservation of the capital and also helps to minimize the overall risk. Some of major examples of the conservative investment are government bonds, corporate bonds, blue chip securities, and large cap stocks. Blue chip securities are those shares that provide regular returns to their shareholders in form dividends and increase in share price over the time period. As Qantas has ability to provide better returns and has capability to pay the dividends it can be regarded as the conservative investment for long duration of time (Ross, Jaffe and Kakani, 2008).

Calculation of WACC

Formula used in WACC is as follows:

While estimating the WACC there is need to keep in mind the following points:

• Qantas Airways has only used only two sources of capital i.e. debt and equity to finance the assets of the company
• The value of equity has been taken at market capitalization rate given on Reuters i.e. $ 10,784.19 (Reuters, 2018)
• The market value of debt is not readily available so book value of debt has been taken i.e. $4,838.00.
• Cost of equity has been taken as required rate of return calculated in part 6 of this report
• Cost of debt has been provided in the annual report of company and it is subject to tax rate of 30% (Schlichting, 2013)

Calculation of WACC (Qantas Airways)
Capital	Amount	Weights	Rate BT	Rate AT	Weighted Cost
	(in million $)		Tax Rate 30%
Debt Part	$      4,838.00	30.97%	6.70%	4.69%	1.45%
Equity Part	$   10,784.19	69.03%	8.92%	8.92%	6.16%
Total	$   15,622.19	100.00%
				WACC	7.61%

Impact of higher WACC on the upcoming investment projects

In case percentage of WACC is greater than the actual return than it means company is paying more as it is receiving from any project. WACC implies rate at which company has to finance assets. In the current scenario the WACC of Qantas Airways is 7.61% and if actual return from the upcoming projects is lower than 7.61% than it clearly implies that company it somewhere losing its value. Also there might better source capital available in the market that has lower WACC to satisfy the return the prospective investments are providing (Zimmerman and Yahya-Zadeh, 2011).

Optimal capital structure

Optimum capital structure refers to the balance between the sources of funds i.e. debt and equity so that overall WACC can be kept low. As per definition of optimum capital structure company must procure only those funds that has lower cost of capital and can be easily available. In the case of Qantas Airways the cost of debt seems to be lower than the cost of equity that indicates company can depend on the debt capital as the major source of finance. The debt ratio of the company was 0.38 during the last two years that shows major part of assets has been financed using the debt as the source of capital. So it can be said that company has been maintaining preferred optimal capital structure and it has been stable since last two years (Arnold, 2013).

Beta Factor

Adjustment to the gearing ratio

It has been seen that there was increase in gearing ratio as debt capital of the company has been raised by $419 million. Qantas Airways has buy back the equity share amount to $366 million in year 2017 and also repaid the borrowing of $453 million, to adjust the gearing ratio. Director’s report does not talk about any adjustment they have made to adjust the gearing ratio (Brealey, Myers and Marcus, 2007).

Qantas Airways is following the conservative dividend policy to pay the dividend to their shareholders. Company as paid total dividend of $254 million in year 2017 and but does paid any dividend in year 2016. Here dividend paid means actual paid in year not declared and paid in the respective years. Despite of EPS of $0.49 and $0.46 in years 2016 and 2017 respectively, company has paid dividend of $ 0.14 in year 2017. It means company is saving the earned amount for their future projects (Qantas Annual Report, 2017).

Dear Client,

This is to bring into your knowledge about the financial performance of Qantas Airways Ltd to facilitate the investments related decision-making process. Qantas Airways is having an efficient ownership-governance structure by possessing a board team having high skills and competencies and also carrying out their job functions in an independent manner. The Board members does not have stake in the shareholders of the airline and therefore it can be categorized as non-family company. The financial performance of the airline at present cannot be regarded as growth as there is decline in its major performance ratios in the year 2016 as compared to the year 2017. The airline’s liquidity position is on a declining trend as reflected from its short-term solvency ratios. Also, it is using more debt in its capital structure as reflected from its long-term solvency ratio’s outcomes. Its efficiency to generate revenue from its asset base has also declined as reflected from its asset utilization ratio. The profitability ratios have indicated that it is not having at present a good profitable position and is experiencing a major decline in its net margin, return on total assets and return on equity ratios. Also, it is not paying good dividend to the shareholders as reflected from its market ratios. The airline has not paid dividend in the year 2016 and in the year 2017 the dividend payout ratio was significantly less in comparison to the earning per share. Thus, it can be stated from the overall financial analysis that airline financial performance is not up to the market and therefore investors are recommended to wait before investing in the airline. The investors should watch carefully the future growth realized by the airline before considering their investment related decisions.

References

Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.

Brealey, R., Myers, S.C. and Marcus, A.J., 2007. Fundamentals of Corporate Finance. Mc Graw Hill, New York.

Lumby,S and Jones,C. 2007. Corporate finance theory & practice. Thomson.

Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.

Moles, P.  and Kidwekk, D. 2011. Corporate finance. John Wiley &sons.

Morning Star. 2018. Qantas Airways. [Online]. Available at: https://financials.morningstar.com/ratios/r.html?t=QUBSF&region=usa&culture=en-US [Accessed on: 22 May 2018].

Qanatas. 2018. News Room. [Online]. Available at: https://www.qantas.com/travel/airlines/media-room/global/en [Accessed on: 22 May 2018].

Qantas Airways Ltd. 2018. Our Company. [Online]. Available at: https://www.qantas.com/travel/airlines/company/global/en [Accessed on: 22 May 2018].

Qantas Annual Report 2017. [Online]. Available at: https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/annual-reports/2017AnnualReport.pdf [Accessed on: 22 May 2018].

Reilly.F.K. and Brown.K.C. 2011. Investment analysis & portfolio management. South western Cengage learning.

Reuters. 2018. Qantas Airways. [Online]. Available at: https://www.reuters.com/finance/stocks/overview/QAN.AX [Accessed on: 22 May 2018].

Ross, A., Jaffe, J. and Kakani, R.K. 2008. Corporate Finance. Pearson.

Schlichting, T. 2013. Fundamental Analysis, Behavioral Finance and Technical Analysis on the Stock Market. GRIN Verlag.

Yahoo Finance. 2018. All Ordinaries. [Online]. Available at: https://finance.yahoo.com/quote/%5EAORD/history?period1=1451586600&period2=1517337000&interval=1mo&filter=history&frequency=1mo  [Accessed on: 22 May 2018].

Yahoo Finance. 2018. Qantas Airways. [Online]. Available at: https://au.finance.yahoo.com/quote/QAN.AX/history?period1=1451586600&period2=1517337000&interval=1mo&filter=history&frequency=1mo [Accessed on: 22 May 2018].

Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258-259.