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Qantas Airways: Financial and Economic Interpretation

MBA403 Subject Name: Financial and Economic Interpretation and Communication

Assessment Description:

This assessment requires you to prepare a wealth report for a prospective shareholder that interprets the annual report of an Australian company and makes appropriate recommendations about the company’s suitability for investment You will be assessed on the thoroughness of your interpretation, including the conclusions you draw, the recommendations you make, and the way in which these have been justified by the evidence you include in your report. Importantly, it needs to be focused** on the needs and priorities of a prospective shareholder. **You will be penalised if you engage in ‘data dumping’ without accompanying interpretation and analysis. 

Task

You need to choose a company that is currently listed on the ASX. You are required to write a report interpreting the company’s most recent annual report. This report will need to be written for a potential investor. You will also be required to source additional information about the company’s performance, for example, via credible articles that discuss the management of the company. Please note that where the annual report may have both group and parent company financial statements, you should use the group financial statements. It is important that you refer to financial analysis measures in your report. See “Workbook: The Tools we use” file which can be found in Supplementary Resources at the bottom of the subject resources page on the portal. This provides further elaboration and for examples of analysis measures that you can use. These can be selected from any analysis measures stated in the annual report and/or your own calculations based on financial statements in the annual report or those provided to you by your workshop leader. It is important to source financial information relevant to your stakeholder. Relevant non-financial topics are outlined in Resource B below. It is expected that the language and structure of your report will reflect its formal nature and the preference of the potential shareholder. 

Answer

MBA403

Assessment 3: Wealth Report

Wealth Report of Qantas Airways

Executive Summary

The report analyses Qantas Airways Limited to conclude if the company is good for investment for the potential investor. The analysis is based on the evaluation of the financial performance and market reviews of the company. The Australian airlines market is the duopoly of Qantas and Virgin. Qantas Airways Limited (QAN) has the main business of transportation of passengers. It operates under two complementary airline brands - Qantas and Jetstar. Qantas is a low fare airline owing to price war with Virgin (Koster, A., 2018).  

Analysis

Qantas is the largest Australian domestic as well as international airline. The airlines carry a very strong brand name.  Some information on the financial performance of Qantas group in last five years from its Annual Report for the year ended 30 June 2017 is as follows:

YearEarnings Per Share (cents)Net Profit Before tax (in Millions)Profit After Tax (in $ millions)Return on Invested Capital (ROI)
20130$186$2-
2014-128.5$(646)$(2,843)(1.5%)
201525.4$975$56016.2%
201649.4$1532$102922.7%
201746 c$1401$85320.1%

The financial performance indicators above show increase in profitability and returns in last five years. The decline in profits in 2017 from 2016 is not due to operational setback but because of the one-off benefit on the sale of Sydney domestic terminal in FY 15-16.  Year ending 2017 is the year with second highest PBY in the history of the company. 

Market performance of the company is analyzed with the help of the share price and dividends yield. Per share statistics of the company are as follows:

YearDividends per shareBook Value per ShareP/E Ratio
20150 cents$1.5745.3%
20167 cents$1.7135.5%
201714 cents$2.0241.5%

The per share values of the company show an increase in the dividend distributed by the company in last three years. There has been an increase in the book value of the share and the P/E ratio of the company. 

The five year share price chart of the stock of the company as compared with the S&P 500 is as follows:


Source: https://in.finance.yahoo.com/quote/QAN.AX?p=QAN.AX

The five year growth chart shows that the Qantas stock has performed significantly higher than the S&P 500 index. 

Interpretation

The financial performance of the company shows a growing trend with increase in profits and return on capital. The return to the shareholders has also increased over the last five years. The dividends have grown significantly and the capital gain on the stock price is about 350% which is way more than S&P index. 

The governance of the company is guided by the financial framework which is aligned with the objectives of the shareholders. To achieve the objective of growing EPS and high shareholder return, the management follows the three basic rules of the framework (Annual Report, 2017, pg. 13):

  • Maintain the optimal capital structure by controlling the debt level
  • Selection of investment projects such that the ROIC > WACC
  • The growth and expansion is disciplined with well researched investments options only and the excess of capital is retuned to the shareholders

On the internal growth and learning front Qantas is continuously going through structural changes in order to expand and improve its services. The company has added various new routes and lowered the fares.  In order to meet competition and fight the increasing cost of fuel, the company is constantly trying to reduce the cost of operations. The company has strategically moved away from some routes that were slow-growth and low margins.  The company has also invested in digital technology to improve the customer experience like free wi-fi service on the flights, innovative baggage tags to speed the baggage checking process.  The loyalty points program of the company is also working as a huge incentive in attracting the customers and enhancing the satisfaction of the regular flyers with the airlines. The program is also expected to help the airlines in maintaining the profit growth trajectory (BCG, 2017).

The market analysis of the Australian airlines industry shows a slow growth. In this scenario Qantas growth has been significantly good. The market share of the company has also increased. The company has a high band value which supports the conclusion that the future returns of the company will be good.  The market valuation of the company shows that the company is not trading at s discount and so the current shareholders expect good returns from the company in future (Koster, A., 2018). 

Conclusion & Recommendation

The analysis and interpretation of the financial performance of the company and its market position, it is concluded that Qantas is there to stay and grow in the Australian airline industry. The profit and growth trajectory of the company has been positive over the last 5 years. The long returns to the shareholder have been as much as 350% in 5 years. The management attitude towards fulfilling the shareholders objectives and efforts to satisfy the customers and other stakeholders supports the growth and high returns to the investors. 

As in investor in the equity market the objectives are to earn high returns with limited risk without impairing the liquidity. The stocks of the company are frequently traded on the ASX and hence the liquidity is not a problem.  The historical data on dividend and share price shows good regular income as well as high capital returns. The growth strategies of the company and lack of new players in the market ensures the growth trajectory to continue for the company.

The potential investors are recommended to invest in the shares of the company. 

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