Virgin shareholders unlikely to see return
Virgin Australia, Australia’s second-largest domestic airline, is unlikely to make significant capital returns to shareholders but the threat of a mop-up by the three airlines holding a combined 73 per cent stake provides a floor for the share price, says broker First NZ Capital.
First NZ Capital has initiated coverage on Virgin with a ‘neutral’ rating and target price of 50 Australian cents per share compared to the current trading price on the ASX of 49 Australian cents.
In a research note, its analysts say Virgin’s balance sheet is in weak condition and, in their view, the three airline shareholders – Air New Zealand with a 25.9 per cent stake and Singapore Airlines and Etihad – have strategic interests in addition to maximising profits.
Virgin’s valuation is expensive compared to Qantas Airways and Air New Zealand, trading at a multiple of six times earnings before interest tax, amortisation and rent/restructuring costs (EBITDAR), compared to the global average of 4.6 times.
“We believe the threat of the large airline shareholders acquiring the outstanding shares, places a floor under the Virgin share price,” the note said.
The shares, along with those of other airlines, have risen in the past year due to the slump in oil prices, and have gained 8.8 per cent so far in 2016.
Virgin Australia has signalled a return to profitability this year after reporting an annual underlying pretax loss of $A49 million to the end of June 2015, an improvement of $A162.7 million on the previous period.
First NZ said consensus forecasts from analysts have not materially changed despite crude oil prices plummeting 40 per cent. It forecasts underlying profit of $A152 million in 2016, mainly due to lower fuel costs and a relatively benign competitive environment in the Australia domestic market.
The research note says that while Virgin is focused on repairing its balance sheet, it has less ability to invest in growth and there will only be low extra capacity into the domestic market, which results in higher pricing and profitability for the dominant airline Qantas.
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