Qantas Airways Ltd: Analysis and Valuation
Qantas Airways Ltd: Analysis and Valuation

Qantas Airways Ltd: Analysis and Valuation

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  • Pages: 7 (3179 words)
  • Published: October 30, 2017
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Executive Summary

This report tries to analyze 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 suggest an existing investor’s about offloading his/her investment in the company or keep sticking to it.

The report has employed a top-down approach to sharing 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 a serious economic slump. Overall, the 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 the 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 traveling by air than the conventional modes of transport. The report has employed a dividend valuation model and price-earnings approach to the valuation. The dividend valuation model’s constant growth version has been used in the report whereas the simple P/E multiples approach has been used to add credibility to the dividend valuation model’s results. For the 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 the constant growth dividend model to calculate the intrinsic value and ascertain whether the share is overvalued r 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 a

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long as it’s market price is above the intrinsic value calculated by us.


The primary objective of this report is to analyze and value the share of Qantas Airways Limited with an intention to invest or not to invest in the company. The report will serve as a guide to a potential investor who wants to make an investment in the said company. Therefore, the report also gives a recommendation about whether or not to invest in the company.

Moreover, this report has been prepared to fulfill the passing criteria of HBC618 Personal Investment.

Economic Analysis

The world economies depend on one another immensely as they are connected through trade, migration and investment. Presently, the global economy has slowed down as a result of the credit market turmoil and tightening of financial conditions in the developed countries, especially in the US.

On the other hand, this has not affected the economic growth in Asian countries such as India and China which still have been strong. This has been one of the major factors for the Australian economy to be in a strong position, as China and India are one of the biggest consumers of Australian exports. In the year 2008 Australia has seen an increase in its cash rate (also known as Interest rate) twice by 25 basis points. At present the cash rate is 7. 25 percent. One of the major reasons for such a tightening of monetary policy is the rising inflation in Australia.

Presently Australia is experiencing an inflation rate of 4. 2 percent which is above the Reserve Bank target of 2 to 3 percent. In addition to this, the Australian dollar is strengthening against many currencies which have resulted in improved terms of trade for Australia i. e. the price of exports is more than the price of imports. This has put further upward pressure on domestic demand and the inflation rate.

On the other hand, food prices are going up in Australia and especially in the world which has helped put brakes on the surging inflation. Therefore, Recently Reserve bank of Australia has decided to keep the cash rate unchanged at 7. 25 percent even though there have been some signs of inflation. This decision was taken as a result of the economic slowdown. Presently RBA has increased its bench mark rate of inflation to 4. 5 percent (RBA tipped to stay put).

According to the ANZ Australian Economics Weekly, the domestic economy is slowing down due to decline in business and consumer confidence. Therefore, interest rates are going to stay the same throughout 2008. Australian Stock Exchange (ASX) was at its four months high in the last week and is expected to bounce further back after Westpac Bank has announced another record performance amid the global credit crunch.

Industry Analysis

Historically, the Australian Domestic airline industry was confined to two carriers – Qantas and Australian Airlines (formerly Trans-Australian Airlines) – until the early 1990s. They were fully government-owned from 1947 to 1993 when the government sold 25 percent of its shares in Qantas to British Airways for $665 million.

At the same time, it was decided to deregulate the pricing structure

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